Roth Conversion
Here is a situation:
A client with an existing IRA Rollover account of $100,000, wants to contribute $5,500 (non-deductible)to an IRA and convert this amount immediately to a Roth. Is the conversion of $5,500 treated proportionaly triggering taxes, or can he identify/isolate the new contribution as the dollars being converted and thereby avoid triggering taxes owed.
Permalink Submitted by Alan - IRA critic on Thu, 2014-04-03 19:50
The value of all non Roth IRAs must be included in the pro rate calculations on Form 8606 to determine the taxable portion of a conversion. A single account cannot be isolated. In this example, regardless of the amount converted, close to 95% of the conversion would be taxable. However, if the client were able to roll the rollover IRA into their employer plan before the end of the year, that 100k would not be included in the pro rating leaving the conversion of the 5500 tax free.