Applying the Roth Conversion pro rata rule
If I have a SEP IRA ($40,000 all pre-tax) and a TIRA ($10,000 all after tax)and want to do a partial Roth conversion, must I keep the ratio equal by pulling the taxable percentage (80%)from the SEP and the non-taxable portion(20%) from the TIRA? If I converted $10,000 only from the pre-tax account, I would arguably have 10 versus 30 for a future conversion. If I took from 10,000 from the TIRA I would arguably no longer have any tax reduction. What am I missing here? Thanks.
Permalink Submitted by Alan Spross on Fri, 2010-10-22 22:51
For tax purposes these are both considered only one combined IRA. Therefore it does not matter which IRA account you select as the source of the conversion money. Either way the taxable percentage of your conversion will be the same, ie 80%. So you can do a conversion for any partial amount you wish and take the funds in any combination you wish of the two IRAs and the result is exactly the same.
Putting this another way, you have 10,000 basis which you must have documented on an 8606 when you made the non deductible contributions. That basis of 10,000 applies over all your TIRA, SEP IRA or SIMPLE IRA accounts and is not locked into any one particular IRA.
So this is more simple than you thought and more flexible. If you never filed the 8606 forms needed, please advise.