A:

You can convert the contributions to a Roth IRA; however, a portion of the amount you convert to the Roth will be subject to income tax. When your Traditional IRA balance consists of deductible and non-deductible contributions, any amount distributed or converted from the Traditional IRA is pro-rated to include a taxable and non-taxable portion of the assets.

You may figure the taxable amount by using the following formula:

(Total Deductible Contribution/Total IRA Balance) x Distribution/Conversion Amount = Non-Taxable Amount

Let's say you have non-deductible contributions of $8,000 in a Traditional IRA that have grown to $100,000. The taxable amount would be:

(8,000/100,000) X 8, 000=640

Of the $8,000 that you convert, $7,360 would be taxable ($8,000-640=$7,360).

This rule applies even if the deductible amounts and non-deductible amounts are held in separate Traditional IRAs. Also note that if you maintain multiple Traditional IRAs, their total balances must be combined in the formula above to determine the amount that can be excluded from income (i.e. the amount that is non-taxable).

Consult with your tax professional to ensure that the appropriate forms are filed and the calculations are accurate.

Reminder: IRS Form 8606 must be filed for any tax years that you distribute assets from your Traditional IRA if any of your Traditional IRA balances include non-deductible contributions. IRS Form 8606 is used to help you determine the taxable portion of your distribution or conversion. The IRS may assess a $50 penalty for any failure to file Form 8606. The form is available at http://www.irs.gov/.

This question was answered by Denise Appleby
(Contact Denise)

RELATED FAQS
  1. How can I fund A Roth IRA if my income is too high to make direct contributions?

    Roth IRAs are not available to you if you are a high income earner – unless you use the following strategy. Read Answer >>
Related Articles
  1. Retirement

    How To Convert A Non-Deductible IRA Into A Roth IRA

    Here's a step-by-step guide for transferring one retirement plan into another.
  2. Taxes

    Avoiding Too Much Tax On Your Distributions

    IRA assets can't be taxed twice - find out how to avoid paying the second time around.
  3. Retirement

    How IRA Contributions Affect Your Taxes

    Learn how to work with the tax man to avoid getting gouged when you convert your plans.
  4. Retirement

    Roth vs. Traditional IRA: Which Is Right For You?

    To answer this question, you need to consider several of the factors we outline here.
  5. Retirement

    Retirement Plan Tax Form 8606: When To File

    If you have a Roth IRA, you are responsible for keeping track of your pretax versus after-tax assets.
  6. Retirement

    Save Early For Retirement If You're A High Earner

    If you earn a high income, there are many ways you can save extra money for an early retirement.
  7. Retirement

    Deducting Losses On Your IRA Investments

    In regular accounts in which taxes are not deferred, losses on investments can be included on your tax return. Find out how.
  8. Retirement

    Tips On How To Use IRAs To Boost Retirement Savings

    According to the Trustees of the Social Security Fund, the fund will be depleted by 2037. Are you ready?
  9. Financial Advisor

    Top Strategies for Tax-Free Roth IRA Conversions

    Finding a way to convert a traditional IRA to a Roth IRA is a tricky process. Here's when it makes sense to do so.
  10. Retirement

    Converting A Traditional IRA To A Roth

    When is it a good idea to convert traditional IRA funds into Roth IRA funds? And when does it not make sense?
RELATED TERMS
  1. Form 8606

    A tax form distributed by the Internal Revenue Service (IRS) ...
  2. Traditional IRA

    An individual retirement account (IRA) that allows individuals ...
  3. Roth IRA Conversion

    A reportable movement of assets from a Traditional, SEP or SIMPLE ...
  4. Individual Retirement Account - IRA

    An investing tool used by individuals to earn and earmark funds ...
  5. Ordering Rules

    The order in which Roth IRA assets are distributed. Assets are ...
  6. Roth IRA

    An individual retirement plan that bears many similarities to ...
Hot Definitions
  1. Cover Letter

    A written document submitted with a job application explaining the applicant's credentials and interest in the open position. ...
  2. 403(b) Plan

    A retirement plan for certain employees of public schools, tax-exempt organizations and certain ministers. Generally, retirement ...
  3. Master Of Business Administration - MBA

    A graduate degree achieved at a university or college that provides theoretical and practical training to help graduates ...
  4. Liquidity Event

    An event that allows initial investors in a company to cash out some or all of their ownership shares and is considered an ...
  5. Job Market

    A market in which employers search for employees and employees search for jobs. The job market is not a physical place as ...
  6. Yuppie

    Yuppie is a slang term denoting the market segment of young urban professionals. A yuppie is often characterized by youth, ...
Trading Center