Convert a non-deductible IRA to a Roth
I have a client that would like to convert her non-deductible IRA to a Roth IRA this year. It is my understanding that the only tax liability would be on the growth portion of the IRA. Is this correct? Also, She has other traditional deductible IRA’s (not planning on converting these). Will they have any impact on the conversion of the non-deductible IRA?
Permalink Submitted by Alan Spross on Thu, 2012-10-04 16:59
The client cannot isolate that one IRA account when converting for purposes of calculating the tax free portion.
When converting, the entire balance of all of the taxpayer’s TIRA, SEP IRA or SIMPLE IRA account must be included in the calculation done on Form 8606. Form 8606 was also used to document past non deductible contributions.
The tax free % of any converted amount would be the amount of non deductible contributions divided by the adjusted year end total value (adjusted for any distributions or conversion itself). The effect of these rules is that the tax free amount is the same regardless of which IRA account is converted. Due to the other IRA amounts, it sounds like this conversion would be mostly taxable.
Putting it another way, the taxable amount is calculated as if all her non Roth IRA accounts were combined into a single account, and she converted part of that account.