Converting Partially non-deducted Ira to a Roth?

Submitted by Keith Kim on Wed, 2021-05-05 05:14

Hi,
Thank you for your time in advance.
I have a client who contributed to a non-deductible ira stated on line 2 on 8606.
Is there any reason NOT to convert this to a Roth?
What’s the difference between leaving it as non-deducted IRA and converting to a ROTH?
I was informed that non-deductible IRA will not be taxed on distributions as well, but am thinking it can be a lot of work?

Also, would converting this non-deducted amount be an issue if she has other IRAs?
I’m still getting this mixed with roth conversion..

Thank you for your help.



Submitted by Alan - IRA critic on Wed, 2021-05-05 13:46

Add up all client’s non Roth IRA balances. Then divide the Form 8606 basis on line 2 or 3 if a new ND contribution is made by that total balance.  The result is the % of the conversion that is non taxable regardless of how much is converted. The basis alone cannot be converted as it cannot be separated from the rest of the pre tax balance regardless of which IRA is converted.

Submitted by Keith Kim on Thu, 2021-05-06 14:53

Thank you for the confirmation on conversion rate. If the client just left it as is, would this “non-deductible” basis be taxable upon distribution?I’m trying to find out if it’s easier to just leave it as is or convert it to roth in order to avoid tax pitfalls. 

Submitted by Alan - IRA critic on Thu, 2021-05-06 15:51

If left as it, any distribution would be reported on Form 8606, which calculates the taxable/non taxable portions of the distribution. This calculation is the same as for a conversion. There will be no double tax if the 8606 is handled correctly.  The conversion results in all future gains being Roth gains and potentially non taxable, and the Roth will also avoid RMDs during owner’s life. Generally, a conversion is beneficial if the marginal tax rate paid is not higher than what would be estimated in retirement, and a conversion is also beneficial to the extent that the IRA basis % is higher. 

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