Roth Conversion of Non-Deductible IRA
In 1992, prior to age 70. a taxpayer established a 100% non-deductible IRA in a mutual fund. A year later she started taking RMD’s. At this point total withdrawals have exceeded her original investment, and the account value is less than the original investment. Since she doesn’t need the RMD’s, what, if any, portion of this account would be subject to tax if she converts it to a Roth IRA?
Permalink Submitted by Alan Spross on Tue, 2009-04-07 01:04
As long as there is a balance at year end, she must take the RMD and cannot convert the RMD, except in 2009 when the RMD is waived. She can convert additional amounts above the RMD in other years when an RMD applies. However, in 1992 the max contribution was only 2,000, and she could file an 8606 to report that non deductible contribution now. She could then start to apply this basis percentage to any future RMDs or conversions. While the basis is the IRA is apparently 2,000, how much is the IRA total value?
Permalink Submitted by Sidney Poretsky on Tue, 2009-04-07 23:28
Actually, the mutual fund account was established with $18,378 in July 1992 as a rollover from a matured IRA CD. Systematic withdrawals (RMD’s) based on a single life expectancy stated in December 1993 (age 71-1/2). Withdrawals to date total $23,465.
Dividends and capital gains distributions have been reinvested. Current account value is $13,250. 2008 RMD was taken in December. 2009 RMD has been stopped. I’m not sure how the accountant has been reporting the non-deductible distributions. The question is, if this non-deductible IRA account was converted to a Roth IRA (in order to avoid future withdrawals), would there be any reportable income?
Permalink Submitted by Alan Spross on Tue, 2009-04-07 23:55
Your first post suggested that a non deductible regular contribution was made in 1992. However, that was apparently a rollover contribution instead. How much did she actually contribute in regular contributions that were non deductible between 1987 and 1992, and was it reported on Form 8606?
The gross dollars invested does not matter here like it does in a non qualified annuity. The only basis she would have is from non deductible (non rollover) contributions if she ever made them. Otherwise, any distribution or conversion of the remaining balance would be 100% taxable.
With a current value of 13,250, even if she made non deductible contributions for 6 years, she would only have a basis of 12,000 less any of that basis that was applied to her distributions over the years. I would look at her recent tax returns to determine whether there is a Form 8606 attached. The most recent one would show the amount of basis she has remaining, IF ANY.
Permalink Submitted by Sidney Poretsky on Fri, 2009-04-10 23:01
Are you saying then that any gain over her cost basis is subject to tax?
Permalink Submitted by Alan Spross on Fri, 2009-04-10 23:45
Yes. But again, an IRA is not taxed like an annuity non periodic distribution. Each distribution would be pro rated based on the % of basis remaining per Form 8606 vrs the year end adjusted value of all IRAs. The % that represents non deductible contributions is tax free, and the rest is taxable.
Permalink Submitted by Sidney Poretsky on Sat, 2009-04-11 13:08
Many thanks for your help with this. I also found the post by 1spspsp and your replies most helpful.