IRA conversion to Roth
Hi,
I am one of your new subscribers and I have a couple of questions about my IRAs.
Most of my traditional IRAs were not tax deductible because of income. Does this mean when I convert these traditional IRAs to Roth IRAs that I only have to pay taxes on the gain and not the contributions (since they were not tax deductible I already paid taxes on them!!)? Will that tax be as ordinary income or capital gain or some other rate? My earlier IRAs were tax deductible, how are those treated if I chose to convert to Roths?
I would appreciate any guidance you can give…being new to your service I am unsure where I can obtain some of this basic info. I turn 60 in October, so I assume I can withdraw from my IRAs without penalty then & I do not have to await until I start S.S. …..[I do not plan to but want to know I can if I needed to].
Thank you so much
Permalink Submitted by Alan Spross on Sat, 2007-08-25 01:17
Welcome to the site.
Since you have passed 59.5, and distributions from your TIRA are only subject to ordinary income tax, but no early withdrawal penalty.
For each year in the past, going as far back as 1987, you may have made a non deductible TIRA contribution. You should have filed Form 8606 each year with your return showing not only the current year non deductible contribution, but the form also accumulates the total of any past such contributions. If you failed to file that form, you are still in luck, but would have to research all those old returns and then file retroactive Form 8606 for each year starting with the oldest and bringing the total forward in each year you did not deduct your contribution. The IRS has been accepting these old forms so far, but you should get the job done soon if you need to before they change their mind. Once you have established a total basis of $x per latest Form 8606, all distributions from any of your TIRAs are tax free based on the ratio of x to the total year end value of those IRA accounts adjusted for distributions. The taxable calculation is also done on Form 8606, so you need to be very familiar with that form.
In a nutshell, then you do only pay taxes on the gains, and do not pay double taxes on contributions you never deducted in the first place. If you convert to a Roth IRA, is does NOT matter which accounts you convert because the taxable part of the conversion is based on your total IRA balances as described above. The taxable portion of a Roth conversion is calculated the same way as a TIRA distribution, and again Form 8606 (a different part) is used to report conversions. All taxes are based on the ordinary income rate, never on capital gains rates. If you convert to a Roth, don’t do too much in a single year as you can inflate your tax bracket by so doing. It may be appropriate at age 60 to convert a certain amount over a period of years, but the decision on how much to convert can involve consideration of many factors.