Converting Non-Deductible IRA to a Roth IRA
Does anyone know what the tax consequences are for an owner of a non-deductible IRA converting to a Roth IRA? It seems there is some tax for those owners not converting existing deductible IRA before the non-deductible.
Thanks,
Justin
Permalink Submitted by Alan Spross on Mon, 2011-06-13 16:49
The tax for a conversion is based on all owned TIRA accounts, not just on the account used to fund the conversion. For example, if you have a rollover TIRA valued at 75k and all pre tax, and a contributary TIRA worth 25k to which you made 20k of non deductible contributions, a conversion from EITHER account would be 80% taxable. This statement is also true of distributions which are not converted.
Form 8606 is used to report conversions and other distributions and generates the taxable amount for a conversion and will also show how much basis remains from non deductible contributions. Using the above example, if you converted 10k, 8k would be taxable and 2k would be tax free basis recovery. You would be left with a non deductible balance of 18k.
Therefore, it does not matter which IRA account is converted first. The tax bill is pro rated as if there was only one large TIRA.
Permalink Submitted by Justin Whelan on Mon, 2011-06-13 17:10
Excellent. Thanks for such a quick response.