Converting non-deductible IRAs to Roth IRA
Greetings,
I have a new 65 yo retired client that over the years has been making non-deductible IRA contributions in addition to company retirement plans. These company plans have since been rolled over to IRAs. He has done a good job of not mixing any non-deductible dollars with rollover dollars. As a side note, between he and his wife, they have four seperate non-deductible IRA accounts totaling approximately $50k. His five rolled over IRAs total approximately $1m. We are investigating the benefit of converting these non-deductible accounts to a Roth IRA to reduce his future RMD. Since they have been kept seperate from one another, can we simply (dangerous word) isolate the non-deductible conversions. I am assuming the taxable calculation to him would be the amount converted minus the basis. Any assistance/advice would be greatly appreciated. Thanks.
Permalink Submitted by Alan - IRA critic on Wed, 2013-01-30 20:24
Unfortuneately, all his IRA accounts are treated as one combined account, therefore the 1mm rollover IRAs will make whatever conversion amount chosen mostly taxable. He should have done his conversions prior to the rollovers. However, if his wife does not have rollover or other large pre tax values in her IRA, she can convert her TIRAs with a much higher tax free portion. Form 8606 will calculate the portions of any of their conversions that is taxable, and of course they each should also have filed an 8606 for each year they made a non deductible contribution. Under the circumstances, she should probably convert her TIRAs first, since converting his will be 95% taxable.
Permalink Submitted by Charles Sells on Mon, 2013-04-01 21:08
So if the client is simply converting Taxable IRA’s then this aggregation of all IRA dollars does not apply?? In other words my client could convert 1 taxable IRA and only that portion would be taxable and not have to include her other taxable IRA’s in the year she converts. Is that correct???
Permalink Submitted by Alan - IRA critic on Mon, 2013-04-01 23:09
No. For determining the % of basis for the conversion, all non Roth IRA balances are included in the calculation. Therefore, it does not matter which IRA is converted, since they are considered to be one combined IRA. Partial conversions can still be done to reduce the taxable amount, but the % of any conversion that is tax free is the same regardless of which IRA funds the conversion or how much is converted.