Roth Conversion and The Pro Rata Rule

[Yoheadden]

I was reading about how to minimize the tax bite on Roth conversions and this came up. Honestly, After reading the same thing 5 times, my head started to go numb. Can anyone with more experience shed a little light on this potential tax saver. Thank you

 

[pb4uski]

I think they are just talking about situations where the tIRA might include non-deductible contributions, so you have basis in the tIRA that would not be taxed.

Many/most people did not make non-deductible contributions and as a result have no basis and this is not an issue.

So as an example, let's say that over they years that you contributed $100,000 to your tIRA and of that $80,000 was deductible and $20,000 was not... and that the tIRA has grown to be $500,000.

You then do a Roth conversion for $50,000 (10%). Of the $50,000, only $48,000 is taxable and $2,000 is not.... the $2,000 is a partial return of your $20,000 of nondeductible contributions.

 

[Yoheadden]

That is what they were saying, but thank you for clarifying it.
In what situation would someone make a non-deductible contribution?

 

[Crabby Mike]

That is what they were saying, but thank you for clarifying it.
In what situation would someone make a non-deductible contribution?

I made non-deductible contributions in several years when I was w#rking. As I recall, a financial adviser talked me into it because had maxed out my 401k contributions, and wasn't eligible to make deductible tIRA contributions. And it was either before Roths, or I made too much $.

If I'd realised what a pain it would be come withdrawal time I wouldn't have done it.

 

[cathy63]

That is what they were saying, but thank you for clarifying it.
In what situation would someone make a non-deductible contribution?

An IRA contribution is non-deductible if you have a 401(k) or similar retirement plan available to you through your job and you earn more than $75k ($124K for married filing jointly). You might want to save more than your work plan allows, and a non-deductible contribution to a tIRA is one way to do it. This was more common before the invention of the Roth IRA though.

 

[2017ish]

We made 7 or 8 years of nondeductible contributions in the old days well before high earners were eligible for Roth conversions. Irritating to jump through the hoops to claim the .005% pro rata on DW's conversions the last 3 years, but every dollar helps!

Today, I can't see any reason for nondeductible contributions except as part of backdoor Roth.

 

[pb4uski]

Yeah, back in the 80s I figured that it would be a record keeping nightmare so I decided to just not do nondeductible contributions.

 

[Gumby]

I made non-deductible contributions long ago, before I realized what a pain it would become.

 

[Alan]

An IRA contribution is non-deductible if you have a 401(k) or similar retirement plan available to you through your job and you earn more than $75k ($124K for married filing jointly). You might want to save more than your work plan allows, and a non-deductible contribution to a tIRA is one way to do it. This was more common before the invention of the Roth IRA though.

This was how I came to have a non-deductible IRA. It was much smaller than my 401k when I retired so I did something that I learned here. The first year after retiring I converted the whole of the IRA to a Roth since the large deductible 401k was not taken into account with the conversion. The following year I then did a 401k to IRA rollover which was tax free and left me with an IRA that had a zero cost basis, and eliminated the 8606 form paper trail ongoing.