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)

Hot Definitions
  1. Smart Home

    A convenient home setup where appliances and devices can be automatically controlled remotely from anywhere in the world ...
  2. Efficient Frontier

    A set of optimal portfolios that offers the highest expected return for a defined level of risk or the lowest risk for a ...
  3. Basis Point (BPS)

    A unit that is equal to 1/100th of 1%, and is used to denote the change in a financial instrument. The basis point is commonly ...
  4. Initial Public Offering - IPO

    The first sale of stock by a private company to the public. IPOs are often issued by smaller, younger companies seeking the ...
  5. Border Adjustment Tax

    A tax levied on goods based on where they are sold – exported goods are exempt from tax; those imported and sold in the ...
  6. Profit and Loss Statement (P&L)

    A financial statement that summarizes the revenues, costs and expenses incurred during a specified period of time, usually ...
Trading Center