Converting Traditional and Non-deductible IRA funds over to a Roth
A person has a non-deductible IRA valued at $64,000 with a $45,500 basis. They also have $800,000 in other, traditional IRA accounts. They are retired and do not have any 401k funds. It is understood that if they convert the non-deductible IRA to a Roth, the calculation of the taxable portion of the Roth conversion would be based on their total IRA funds. So they would divide the basis of the non-deductible IRA ($45,500) by the total traditional IRA ($45,500/$800,000) and get 5.7%. The 5.7% would be the portion of the conversion that would be “tax-free” representing their basis. If they choose to convert a portion of their IRA over to a Roth EACH year, over a period of several years, would the 5.7% apply to the conversion amount EACH year? So if they did a $100,000 conversion this year, $5,700 would be tax-free and $94,300 would be taxable? and then the same next year? and so on?
Permalink Submitted by Alan - IRA critic on Mon, 2023-11-06 20:26
The non taxable portion is calculated by dividing the basis (45,500) by the total value of all IRAs (800,000 plus 64,000) which is 5.266% of the converted amount. This math is documented on Form 8606 each year, so the non taxable portion will be larger if there are investment losses and smaller if there are investment gains. Losses or gains result in a change of the year end value of the IRAs.