deductable IRA and non-deductable IRA
I have a account for deductible IRA for 2005. This year I am not qualified for the either ROTH or deductible IRA and consider to buy non-deductible IRA, my questions are
1) Can I put non-deductible IRA and deductible IRA in the same account. It looks like my custodian account only shows tradition IRA or ROTH and not showing if it is deductible or non-deductible IRA. If answer is no, I have to open another account for the non-deductible account
2) If yes, how can I differentiate two contribution? If in 2010, I want to convert the traditional IRA to ROTH IRA, I need pay tax for the gain for sure. Do I need pay tax for the portion I deferred in tax year 2005? And also the same for the qualified distribution, do I need pay tax for the part deducted in 2005.
thanks in advance.
Permalink Submitted by Alan Spross on Fri, 2008-03-21 19:40
You can make the non deductible contribution this year to the existing traditional IRA. The custodian does not know whether your contributions are deductible or not, and would not register the IRA to show the status of your traditional IRA contribution. When you file your tax return any non deductible traditional IRA contribution is reported on Form 8606. This is how both you and the IRS know how much of your account has already been taxed.
When you take a distribution OR make a Roth conversion, the tax result is the same. The pro rated portion of the conversion that represents the amounts reported on Form 8606 over the years is tax free. This prevents double taxation. Only the amounts that have been reported on Form 8606 are tax free. Deductible contributions and earnings are taxed when a distribution or conversion occurs.