Roth Conversion Mistake
Totally forgot about the prorata rule. Client had 40K in Trad IRA and 40K in Roth IRA and makes way too much income to qualify for Roth contribution. Few weeks ago did a $12500 (prev yr and current yr) contribution to Trad IRA then immediately converted the $12500 to Roth. How much of this conversion will be taxable? What if we want to undo the whole thing? I’m sure we could recharacterize the $12500 back to Trad IRA but how can we take the money out of Trad IRA without harm? TA
Permalink Submitted by Alan - IRA critic on Fri, 2013-03-22 16:14
The taxable amount of the conversion depends on how much basis per Form 8606 exists in all his non Roth IRAs. If there were no prior basis, but the 12,500 in recent contributions was non deductible, then around 76% of the conversion will be taxable. If client does not want to pay taxes on the taxable portion, the conversion can be recharacterized back to the TIRA, and then a return of the specific contributions can be requested from the TIRA. The only tax due will be on any earnings generated on the 12,500 while this contribution was either in the TIRA or the Roth IRA. 10% penalty on the earnings also applies unless client has reached 59.5. But no part of the 12,500 will be taxable.