Non-Deductable IRA’s
Contributions to a regular IRA were non-deductible (after-tax). Is the conversion to a Roth tax-free?
If some contributions were pre-tax and other after-tax, how is conversion treated for tax purposes.
Contributions to a regular IRA were non-deductible (after-tax). Is the conversion to a Roth tax-free?
If some contributions were pre-tax and other after-tax, how is conversion treated for tax purposes.
Permalink Submitted by Alan Spross on Mon, 2010-10-25 18:29
The conversion is taxable based on a pro rating of the year end pre tax balance as a percentage of the total adjusted balance for all TIRA, SEP and SIMPLE IRA accounts.
This calculation is done on Form 8606 when the conversion (or other distribution) is reported, but Form 8606 must also be filed to report each non deductible contribution for the year it was contributed. Only the dollar limit of actual contributions are counted as basis in this formula, and earnings are part of the pre tax balance also composed of deductible IRA contributions.
If the taxpayer did not file these 8606 forms in prior years dating as far back as 1987, the IRS is accepting them retroactively without penalty, as long as the basis is not over stated. Since any non deductible contribution or any distribution updates the prior 8606, to determine your basis you only need to look back to the latest 8606 you filed.
See the Instructions for Form 8606 for further details. A special revised 8606 is being released to report 2010 conversions because of the special 2 year deferral option.