Separate Taxed TIRAs for Conversion
I’m pretty sure I know the answer to this question, but I’ll just double check.
I’m already aware that if you have 1 TIRA with some tax deducted amounts and some non-deductible amounts, a conversion to a Roth is done on a pro-rated basis.
What if you have separate TIRAs? One for tax deducted and one for non-deductible. Would it still be based on a pro-rated basis for the combination or could you isolate.
I’m pretty sure I remember reading somewhere that the two TIRAs are treated as one for the pro-rated conversion.
But I also believe that as of recently I can move the deductible money to a 401k(that allows it), thereby isolating the non-deductible portion.
Permalink Submitted by Alan Spross on Wed, 2009-10-21 19:43
No matter how many IRAs you have, they are combined for tax purposes. This means that distributions including conversions are taxable based on the % of basis over all of your TIRA, SEP IRA, and SIMPLE IRA accounts.
You are correct about the transfer to a qualified plan that will accept the funds. The reason that this can be done avoiding the pro rate rules is that a qualified plan cannot accept after tax IRA balances under any circumstances. The plan can only accept pre tax amounts. Therefore, if you have a plan that will accept an incoming IRA rollover, you could transfer the entire pre tax balance leaving only the 8606 basis behind in the IRA. The IRA can then be converted to a Roth tax free. The tough part is getting a plan to accept IRA rollovers. Some of them will only accept rollover IRA transfers because they think that protects them from getting any after tax amounts.