non deductable ira to roth

[mathjak107]

can a non-deductable tradional ira be converted to a roth ? last year we lost the ability to do a roth as we were over the limits so we did a non deductable ira.....this year income permited can i convert the traditional to a roth by just paying the taxexs on any gains?

[Nords]

Originally Posted by mathjak107

can a non-deductable tradional ira be converted to a roth ? last year we lost* the ability to do a roth as we were over the limits so we did a non deductable ira.....this year income permited can i convert the traditional to a roth by just paying the taxexs on any gains?

Yup. Check IRS Pub 590 and Fairmark.com for the details.

The income limit for a Roth conversion is $100K, so if you're not contributing to a Roth then you're probably not able to convert right now. But later in life when you ER your income will probably drop low enough to make conversion a good deal.

There's a whole host of issues about whether it's better to convert now and pay taxes or to let the IRA compound until you're required to start RMDs. Some of the math is messy, other issues are complicated by estate planning, earned income, and taxes Social Security distributions. Conversion is not always the "best" answer. In fact finding the "right" answer is a lot more complicated than the process, which is complicated enough.

[kaneohe]

One further interesting note on conversion: I, perhaps like you, have both deductible and non-deductible traditional IRA funds. To help me track the history, I have segregated them into separate IRA accounts. Dreading the messy math calculations when I have withdraw funds, I thought I would convert the non-deductible traditional IRA into a Roth leaving me (I thought) with a much simpler life of 1)Deductible traditional funds 100% taxable and 2) Roth IRA 100% non-taxable. Wrong! I was told by IRS that they make no distinction about separate accounts for deductible/non-deductible traditional IRAs. They consider them one pool of funds and although you remove the funds from the non-deductible IRA account and put them into a Roth, the IRS will consider those funds to have come from both deductible/non-deductible funds in some proportion that comes out of the messy math. Thus the remaining traditional funds will also be a mix of deductible/non-deductible and so the messy math remains. I have read that the messy math is "not so bad" if you just follow IRS instructions for the lines (and I suppose the tax programs would do that) . Just a another level of complexity that would be nice to avoid tho.

[gindie]

The math is not messy if you've kept track of your contributions to the traditional IRA AND have been filing your Form 8606 with your income tax in years that you've made contributions to your non-deductible account.

For example, let's say that over all the years, you made $10K in contributions to deductible IRA's and $5K to non-deductible. Then, anytime you move money out of any of your IRA (through a distribution or a conversion to a Roth), then 2/3 (i.e. 10/15) of that amount will be assumed to have come from the deductible, 1/3 (i.e. 5/15) from the non-deductible. Simple as that.

[kaneohe]

Gindie,

Thanks for your encouragement. I haven't actually tried to do that calculation and hopefully all you have to do is follow the 8606 instructions and not think too much.

The case you cited is among the simpler examples though. I can conceive of cases where you continue contributing both non-deductible and deductible contributions after withdrawing to do a Roth conversion. Conceptually, at least to me, this gets pretty messy.

It may be , though, as you suggest that if you file the 8606 when required, each 8606 builds on the previous one, and everything is straightforward and no thinking is required provided you do not make any careless errors.

[Nords]

Originally Posted by kaneohe

It may be , though, as you suggest that if you file the 8606 when required,* each 8606 builds on the previous one, and everything is straightforward and no thinking is required provided you do not make any careless errors.* *

Yes, that's the case.*

After a couple trips through both pages of form 8606 with a calendar, a couple years' summary statements, and large quantities of coffee, it's definitely better to just follow the directions and not try to peek above the dashboard to see where you're going.

I've been told by professional tax accountants to stop asking questions and just plug through the form.* Same result either way.

You want scary difficult? Try correctly calculating the RMD for a guy who's making his first withdrawal from a single rollover IRA account that holds 401(k) contributions, employer matches, employee's non-deductible additional contributions, a lump-sum retirement payment, deductible contributions to a conventional IRA, and non-deductible contributions. That's all rolled into one account number with a couple decades of reinvested cap gains & dividends and (thankfully) most of the paper documentation through all the rollovers.

I'll take a couple forms 8606 and a Roth conversion any day.