Non deductible IRA to Roth conversion
My question relates to the following scenario:
-Assume that a person does not have a Traditional IRA.
-They would like to do a non-deductible IRA contribution for 2012 then immediately convert to a Roth IRA.
-In 1 month this person will have a Traditional IRA balance due to a pending rollover from an active retirement plan.
Will the conversion to the Roth IRA have taxes assessed on a pro-rata basis because there will be a Traditional IRA balance during 2012, or is the conversion of the 2012 non-deductible IRA handled first, which would then be a non taxable event? When is the date that the IRS wants to know if you have a Traditional IRA balance in relation to a conversion – year end from 2011 / year end from 2012 / or some other date?
Thank you for any feedback.
Permalink Submitted by Alan Spross on Fri, 2012-05-04 20:25
Form 8606 uses the adjusted 12/31/2012 value to determine how much of the conversion is taxable.
You said the retirement plan is “active”. While still employed, some plans allow only after tax contributions and their earnings to be distributed, so if that situation applied the rollover might include mostly after tax dollars. It is the pre tax dollars that would cause the conversion to be mostly taxable. Therefore, it would be wise to determine exactly what the after tax/pre tax mix was for the retirement plan rollover.
If the rollover includes mostly pre tax dollars, not only will the recent conversion become taxable, but in subsequent years the same thing would happen, ie a non deductible contribution followed by a conversion would be mostly taxable.
Permalink Submitted by Kirsty Peev on Mon, 2012-05-07 13:09
Thank you very much – this is actually exactly what I needed to know!