Can I convert non-deductible contributions made to my Traditional IRA to a Roth IRA without being taxed?

By Denise Appleby AAA
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. Places where I can open an IRA Account?

    Open an IRA through brokerage firms, mutual funds, banks and other major financial institutions, or through large Internet ...
  2. How is compound interest taxed?

    Understand the concept of compound interest as opposed to simple interest and learn the usual tax rate at which compound ...
  3. What rate of return should I expect on my 401(k)?

    Learn what factors affect your 401(k) performance, and understand what a typical rate of return is for employer-sponsored ...
  4. How can an entrepreneur save for retirement?

    Learn about the retirement savings plan options for entrepreneurs and small business owners, including administration and ...
RELATED TERMS
  1. Self Invested Personal Pension (SIPP)

    A tax-efficient retirement savings account available in Great ...
  2. Elder Care

    Elder care, sometimes called elderly care, refers to services ...
  3. Deferred Tax Asset

    A deferred tax asset is an asset on a company's balance sheet ...
  4. Gold IRA

    Definition of Gold IRA
  5. Eligible Transfer

    An IRS-allowed movement of assets into or out of an individual ...
  6. Leveraged Benefits

    The use – by a business owner or professional practitioner – ...

You May Also Like

Related Articles
  1. Trading Strategies

    Top 7 Roth IRA Stocks for 2015

  2. Options & Futures

    Options and Roth IRAs: Do's and Don'ts

  3. Professionals

    Are Longevity Annuities in 401(k)s a ...

  4. Professionals

    Why Retirement Advice Is Better But ...

  5. Professionals

    Coming Soon: Private Equity In 401(k) ...

Trading Center