Roth Conversion
Hello,
Please see below my client’s situation:
The client made non-deductible IRA contributions and subsequent Roth conversions as follows:
- 4/8/2024: Contributed $7,000 for 2024 and $6,500 for 2023 (total $13,500) to a non-deductible Traditional IRA.
- 4/11/2024: Converted the entire $13,500 to a Roth IRA.
- At the time of conversion: No other IRA accounts existed.
- 10/7/2024: Contributed $11,000 to a SEP IRA.
- 4/9/2025: Contributed another $7,000 as a non-deductible IRA contribution.
Her husband followed a similar pattern—making non-deductible IRA contributions and completing a Roth conversion—but he does not have a SEP IRA.
Questions:
- Since she completed the Roth conversion on 4/11/2024 before the SEP IRA contribution on 10/7/2024, does the aggregation /pro-rata rule still apply for 2024?
- If yes, should we use the SEP IRA balance as of 12/31/2024 or as of the contribution date (10/7/2024) to determine the pro-rata calculation?
- Based on this information, if the pro-rata rule applies, we would need to aggregate the amounts as follows:
- Total IRA funds = $13,500 (converted) + $11,000 (SEP IRA balance) = $24,500.
- Therefore, $11,000 ÷ $24,500 = 44.9% of the conversion would be taxable.
Is this calculation correct?
- How should we report the taxable portion of the conversion in the software — under the Form 1099-R input section (box 2a taxable amount)?— and should we also complete Form 8606 to reflect the non-deductible basis and conversion?
- For 2025, she plans to contribute another $9,000 to the SEP IRA and she already contributed $7,000 to a non-deductible IRA. In that case, would 100% of the conversion be taxable?
- Alternatively, can she withdraw the $7,000 non-deductible contribution (by 10/15/2025) and move it to a taxable brokerage account ignore doing the Roth conversion?
- Or would it be better for her to stop SEP IRA contributions altogether and only do the non-deductible IRA plus Roth conversion strategy going forward?
- Does any of this affect her husband’s IRA conversion, given that he has no SEP IRA or other pre-tax IRA balances?
Thank you,
Bez
Permalink Submitted by Alan - IRA critic on Tue, 2025-10-07 19:34
Her conversion in 2024 must be pro rated with the value of the SEP IRA on 12/31/2024, which could be different than the 11,000 contributed. Therefore, Q 1 is yes, Q 2 is 12/31/2024 value, Q 3 is correct as long as the year end value of the SEP remained 11,000. For Q 4, the Box 2a taxable amount is overridden by Form 8606 and would only be correct if there had been no non deductible contributions made. The tax program should prompt for the IRA basis of 13,500 to be entered.
A 2025 conversion would be 100% taxable if the ND contribution was removed as adjusted for gain or loss prior to the conversion. But if the total contributions were converted (none removed), the taxable portion of the conversion would still be 9,000. Even though taxes would be owed for the conversion, the SEP deduction would offset that taxable income. Therefore, better NOT to return the contribution and to convert it unless their marginal rate in 2025 will be much higher than they expect it to be in the future.
Each spouse’s IRA is independent. Form 8606 is individual and shows only one SSN. Husband could convert his ND contribution tax free and would still file his own 8606 to report the ND contribution and conversion. His 1099R would also show the distribution as 100% taxable because the custodian does not know anyone’s IRA basis and is required to show 2a the same as Box 1. But the 8606 will override 2a and in his case the conversion will be tax free.
Permalink Submitted by Beza Asrat on Tue, 2025-10-07 20:25
Thank you so much for the response. I just need some clarification on the second paragraph. One of the plans is to remove the $7,000 non-deductible Traditional IRA contribution and not do the conversion, but continue making the $9,000 SEP IRA contribution. Would this still be a taxable event even if it was not converted?
Also, I’m not following where you mentioned, “But if the total contributions were converted (none removed), the taxable portion of the conversion would still be $9,000.” If I understand this correctly, for 2025, the SEP IRA would have approximately ($9,000 + $11,000 = $20,000). If she converts $7,000 in 2025 to a Roth, then the pro-rata calculation would be ($7,000 ÷ $27,000 = 25.9%) non-taxable, and the remaining 75% of the $7,000 would be taxable, because she is only converting the non-deductible Traditional IRA contribution and not the SEP IRA. Am i correct? because i don’t understand why the taxable portion would still be $9k.
Also, regarding the last sentence in the second paragraph: “Therefore, better NOT to return the contribution and to convert it unless their marginal rate in 2025 will be much higher than they expect it to be in the future.” Their marginal rate is 37% almost every year.
An additional question: each year, she will need to include the total SEP IRA balance as of year-end cumulative, which means the non-taxable portion of future conversions will gradually become smaller as the SEP IRA balance increases each year. She can still continue converting even if she pays tax, since she is getting a deduction for the SEP IRA contribution — correct?
Thank you,
Permalink Submitted by Alan - IRA critic on Tue, 2025-10-07 22:29
If the ND contribution was removed and there was no conversion, there would be no tax due, rather there would be a deduction for the SEP contribution.
Second question – 2025 transactions depend on what was done in 2024, whether there was a conversion in 2024 and if the 2024 ND contribution was removed or not removed. If no 2024 conversion and the 2024 contribution was removed, the SEP will have a balance of 20k in 2025, whereas my prior indication that the taxable amount would be 9k assumed a 2024 conversion of that year’s SEP contribution. Your result of 25.9% non taxable for a 2-25 conversion is correct if there was no 2024 conversion and the 2024 ND contribution had been removed.
If the marginal rate will stay about the same, it will be beneficial to convert in relation to how much the basis % is for that conversion. 25.9 is probably around neutral, but if the basis was 50% and the converted taxable amount was only 50%, it would pay to convert.
Additional question – note that when a conversion is 25.9% taxable, only 25.9% of the IRA basis is used up, and 74.1% of the basis carries forward to the next year and added to the new ND contribution in Part I of Form 8606. Therefore, the taxable portion of future conversions will fluctuate in relation to how much basis remains and the amount of the SEP contribution. Their MAGI is too high to make regular Roth contributions, so conversions are the only way to add to the Roth IRA balances. As you said, the net taxable amount each year will be the taxable portion of each conversion less the SEP deduction. If the SEP contribution stays around the same as the ND IRA contribution, then the taxable portion of a conversion will also stay roughly the same.
Permalink Submitted by Beza Asrat on Tue, 2025-10-07 23:08
Thank you, on the second question above she did 2024 conversion of ND contribution $13,500 on 4/11/24 and she contributed to SEP IRA for 2023 Tax return in 2024 $11,000 (10/7/24). On her 2024 tax return will show this pro-rata. She will not remove the ND contribution of $13,500 (2024 & 2023 contribution). And she didn’t convert her SEP IRA only the ND traditional IRA.
She is only converting the ND contribution but not the SEP IRA contributions.
So for 2025 she contributed $7,000 on 4/9/25 and will contribute $9,000 for SEP IRA this week. Assume she is not removing the ND contribution of $7k. So regardless of the ND traditional IRA conversion to Roth, the SEP IRA will have approx. $20k in 2025(11k for 2023+ $9k for 2024) – correct? And this will be the amount as of 12/31/25 that will be used for next year pro-rata. I’m a little lost here sorry.
Thank you,