IRA to Roth Conversion
I have been contributing to both Traditional or Roth IRA’s over the past several years all
in compliance with the IRS tax codes.
I also have been keeping my Pre-Tax and After-Tax Traditional IRA contributions in separate
IRA accounts.
I would now like to convert my After-Tax IRA account into my Roth IRA account without paying
any taxes at this time.
Will I be in compliance with the IRS tax codes, since I have been keeping my Pre-Tax and After-Tax accounts separate and can, without question, show that they are only After-Tax contributions that I am converting?
It was my understanding that if you have more than one IRA account, you just have to figure the amount to be
converted only on the account from which you withdraw the contribution.
Thank you for your help!
Permalink Submitted by Alan Spross on Tue, 2011-01-18 18:23
Jeff,
Unfortuneately, your impressions were incorrect. When converting or just taking TIRA distributions, all your TIRA, SEP and SIMPLE IRA owned accounts are considered as one combined account. Therefore, there is no benefit to separating your non deductible contributions in the first place, and if you did there is no benefit in converting solely from the IRA that received the non deductible contributions.
If you follow the instructions for Form 8606, on which you must report your distributions if you have non deductible contributions, the result will be as above. The taxable portion of your conversion will be pro rated over all these accounts. SInce you will have a higher taxable portion than you expected, you may want to convert smaller amounts over a period of years.
However, there is a way around this. If your employer plan accepts incoming rollovers from your IRAs, you can transfer the pre tax balance to the employer plan, leaving behind only your non deductible contributions. You can then convert them tax free. Some employer plans will accept rollovers only from conduit (aka rollover) IRAs, and that would not help you if you do not have any such rollover IRAs.