Separate NonDeductible and Deductive IRA Accounts and Conversion of NonDeductible IRA to Roth IRA

Submitted by Rag Rud on Sat, 2023-02-18 04:34

Lets say that I have 2 different IRA accounts. Account A is for money saved as NonDeductible IRA (i.e. contributions to this account were never used for tax deductions) and Account B is for money saved as Deductible IRA (i.e. contributions to this account were used for tax deductions). Account A has $70,000 (includes original contribution + earnings) and Account B has $120,000 (includes original contribution + earnings as well). The original contribution in Account A is $50,000 and earnings are $20,000.

Now I would like to convert all the money (i.e. $70,000) in Account A to Roth IRA (a third account) while leaving current $120,000 in Account B as is. I understand that I need to pay the taxes on $20,000 from $70,000, which is fine.

Question:
Is converting the money from Account A allowed while not touching the money from Account B?

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Permalink Submitted by Alan - IRA critic on Sat, 2023-02-18 14:38

All of your non Roth IRAs are treated as one combined IRA for tax purposes. Therefore, there was never any tax related benefit from maintaining two IRAs all this time. When you convert the balance of both IRAs must be shown on line 6 of Form 8606, which is the form that calculates the taxable amount of your conversions. What you have then is a total balance of 190k, of which 50k is your basis or 26.3% of your total. Whatever amount you convert regardless of which IRA it comes from will have a non taxable portion of 26.3% and a taxable portion of 73.7%. So if you convert 70,000 from either account your taxable amount will be 51,590.
The 50,000 of non deductible contributions you made were also required to be reported on a Form 8606 for each year you made them. That was required for the IRS to give you credit for the non deductible contributions. With an IRA basis of 50,000 you had to make these contributions over several years, and if you took any distributions over that time you also had to file an 8606 to determine the taxes on your distributions, just like the conversion you plan to make. If you did not file those past 8606 forms, please advise.
Knowing the above, if you wanted to consolidate these into a single account for convenience it would have no affect on the above math.
There is only one way around the above situation. If you are still working and your workplace plan will accept IRA rollovers, you could roll the pre tax balance of 140,000 (no more) into the plan, leaving the 50,000 of IRA basis behind. You could then convert the entire 50,000 tax free to a Roth IRA. That would also eliminate pro rating for life unless you make more non deductible contributions.