TRADITIONAL-ROTH TAX COMSEQUENCE
When converting from Traditional to ROTH is one taxed only on pre-tax contributions and earnings? Total IRA value is $100,000–after tax contribution is $15,000— 85% of conversion is taxable? Does one pay tax in the year the money was converted, thus you convert in February of 2008 and have no choice other than to pay tax for tax year 2008? Can’t say–I want to pay for tax year 2007?
Permalink Submitted by Denise Appleby on Mon, 2007-09-10 16:47
The amount converted is prorated to include pre and post tax amount. Therefore, if the entire $100,000 is converted, then $15,000 will not be taxable. If only a portion is converted, then 15% of the amount converted is not taxable.
The conversion is taxable in the year the funds leave the non-Roth IRA. There is no option to choose to have the taxes apply to another year…except for 2010 conversions, where the taxpayer may spread the income (equally) over 2011 and 2012
Some reminders:
[i]All of an individual’s traditional, SEP and SIMPLE IRAs are treated as one (i.e. all balances are aggregated) for purposes of determining taxable amount of a conversion or distribution. [/i]
[i]IRS Form 8606 must be filed for the year the conversion occurs. This determines the taxable portion and informs the IRS of the portion of the conversion that is taxable/non-taxable[/i]