Undoubtedly, the Roth IRA has some strong advantages over the traditional IRA. For example, the Roth IRA offers tax-free withdrawals of contributions and earnings upon the age of retirement, and the required minimum distribution (RMD) is not applicable. Fortunately, traditional IRAs can be converted to Roth IRAs.

### Where It Gets Tricky

When you have an IRA that contains normal contributions, non-deductible contributions, and earnings, the rules of conversions are more complex. It would be fantastic if you could simply single out the non-deductible contributions and only convert that portion to the Roth tax-free. However, IRS rules prevent this strategy. Let us take a look at the special tax treatment of partial conversions for owners with multiple IRA accounts or IRAs with both deductible and non-deductible contributions.

John Doe, a 30% taxpayer, has a traditional IRA worth $200,000 on Dec. 31, 2018, of which$100,000 is non-deductible contributions. Doe wants to convert $100,000 of this IRA to a Roth. Because Doe has$100,000 of non-deductible contributions in this Traditional IRA, you would think that he could convert the 100,000 of non-deductible contributions tax-free. Unfortunately, the IRS has a special formula that must be followed if you own an IRA with normal contributions. Here's how it works: ﻿\begin{aligned} &\textit{Tax-free percentage}=\dfrac{TND}{(YV + C)}\\ &\textbf{where:}\\ &TND = \text{total non-deductible contributions}\\ &YV = \text{sum of year end value of all IRA accounts}\\ &C=\text{conversion amount}\\ \end{aligned}﻿ Thus, given the example above, John Doe would calculate the following: ﻿\begin{aligned} &\100,000 \div (\200,000 + \100,000) = \\ &\100,000 \div \300,000 \\ &\text{Tax-free amount of Conversion = 33\% (or \33,333)}\\ \end{aligned}﻿ Therefore, if John converts100,000 to the Roth, he will have $33,333 ($100,000 x 33.3%) that is not-taxed and $66,667 ($100,000 x 66.7%) that will be taxed at his 30% tax rate.

### The Bottom Line

The common misconception is that you can single out the non-deductible contributions and convert them specifically tax-free. Another misconception is that you simply divide the non-deductible contributions by the total value of the IRAs to determine the tax-exempt amount percentage. However, the formula is a little more complex. But now you know the rules, and doing the calculation correctly will keep the IRS off your back. Consult with your tax professional to ensure that the appropriate forms are filed and the calculations are accurate.