Converting All IRAs to ROTHs
We are having a bit of a question around the office here around converting IRA money to a ROTH. This client has 2 IRA accounts:
Rollover IRA from old 401K of approximately $2K
Traditional IRA we setup March 2016 and had the client contribute $11,000 into ($5,500 for 2015 and $5,500 for 2016). Based on income, these were NON-DEDUCTIBLE.
Now, we would like to convert EVERYTHING into a ROTH IRA. Should we convert the Rollover $2K now, pay the taxes and then wait to convert the other $11,000 in 2017? Or should convert everything together right now in 2016, which will generate a ~$13K conversion with $11K basis and the rest added to taxable income? One person in the office thinks this is fine but another recalls some rule where when you have this exact scenario you should first convert the rollover money and wait for the nondeductible money until the next calendar yet.
Permalink Submitted by Alan - IRA critic on Mon, 2016-06-06 23:21
Convert the entire 13k. While 2k would be taxable, it is a small enough amount to disregard when comparing with the benefit of getting 6 times than much into the Roth IRA ASAP. Note that the 11k of basis in the TIRAs applies to both accounts in total, not to any one particular account. So even if the 2k rollover was converted now, taxes would be due on only 2/13 of that 2k. The other person is probably thinking of the back door Roth scenario where the pre tax balance is rolled over to a 401k and then the IRA basis converted tax free. While the client could do that, 2k is such a small amount that it is probably not worth the effort and should just be converted along with the 11k.
Permalink Submitted by Arek Puzia on Tue, 2016-06-07 15:27
Thank you! That was very helpful!