IRA to Roth IRA tax consequences

The taxable portion of the distribution is subject to ordinary income rates.

If you had ever made nondeductible contributions, then by using form

No, if you are going to convert, and can afford to pay the tax from other funds not in the IRA, it's better to do it when value is lower rather than higher. (Assuming, of course, that you expect it to go higher again in the future -- a big "if"!)

Example: suppose you can "afford" to convert $20K (without pushing yourself into a higher marginal tax bracket, and able to pay the tax on the $20K with after-tax funds). If the total value of your Trad. IRA is $100K, you have just converted 20%. If the total value of your IRA is only $50K, you've converted 40% for the same out of pocket cost.

The flip side is, if you convert when the total value is very high, then the value goes down later, you can potentially "recharacterize" the conversion up to Oct 15th of the following year, a rare opportunity for a "do-over" under the tax law.

-Mark Bole

See "failed conversion."

It depends on what the rules are when you finally draw on the Roth.

-HW "Skip" Weldon Columbia, SC

snipped-for-privacy@panix.com (Arthur Kamlet) wrote in news:gdjctu$pru$ snipped-for-privacy@reader1.panix.com:

I have kept the after-tax and before-tax contributions separate. TIAA did separate out the small contribution I made in the early 70's which I had paid with after tax dollars. I guess I'm in the clear then.

Thanks, Arthur!

So this means you use the last filed form 8606 in order to fill out the new form 8606?

(Hint: If you answer no, Stop: Do not pass go! Do not collect $200.)

Just to be sure, as long as you converted all your traditional IRA accounts to Roth, the taxable amount of the conversion is the total value at the time of conversion minus the amount of after-tax money in your traditional IRA. If you only converted a portion, you have to do additional calculations to figure out the taxable part.

Oh, someone mentioned failed conversions in what was evidently a misunderstanding of your OP. Don't worry about failed conversions. You don't have one.

Mark Bole wrote in news:GzkLk.1316$8 snipped-for-privacy@flpi147.ffdc.sbc.com:

Life's a gamble ...

Sorry, I lost you here. One of several IRA accounts I have is with Citibank. Its total value is ~15K now. I instructed the Citi Smith Barney rep to convert the whole account from a regular IRA to a Roth. I will get a 1099R, hopefully marked appropriately as a Roth conversion. I expect to "organize" (legitimately) funds from somewhere else to pay the tax due. I didn't get the percentages you are mentioning, since it is all of what is in a single account, though I have more accounts.

I'm really hoping that this recession won't last too long ...

snipped-for-privacy@panix.com (Arthur Kamlet) wrote in news:gdl5ht$4uf$ snipped-for-privacy@reader1.panix.com:

Form 8606? I'll have to look into that. Hopefully TaxAct or TurboTax will help me with that ... I don't recall having a separate form 8606 in the package for the last several years at least ... Am I bad now?

Since you have both after-tax and before-tax contributions, you should have filed a form 8606 every time you made a nondeductible (after-tax) contribution, and every time you took an IRA distribution.

The distribution is not taxable to the extent of the unrecovered after-tax distributions. Form 8606 calculates this for you.

Han wrote: [...]

You do not have to convert all of your total Traditional IRA balance in one year, you can choose however much (100%) or little (0%) you like, and are willing and able to pay tax on. It sounds like you have converted just a portion of your total pre-tax IRA balance, and so will only pay tax on that portion. Form 8606 (and accompanying worksheet, if some of your Trad. IRA contribution was non-decutible) will walk you through this calculation.

-Mark Bole

Mark was describing the process involved if you had any post-tax money (i.e. non-deducted) in the IRA. If it was all pre-tax, his explanation wasn't applicable to you.

For anyone who does have a mix - regardless of the number of accounts, CDs, or investments within, you have ONE IRA, and keeping the post-tax deposits segregated is meaningless, 8606 tracks the non-deducted amount, and that's it. As Mark described, any conversion is prorated pre-tax/post-tax money.

Joe

JoeTaxpayer wrote in news:gdm3sf$s1g$ snipped-for-privacy@registered.motzarella.org:

Thanks, Joe and Mark.

snipped-for-privacy@panix.com (Arthur Kamlet) wrote in news:gdm2ba$afd$1 @reader1.panix.com:

Thanks, Arthur. I must have filed those forms somehow when I told TaxAct that I made Roth IRA contributions ...

There's a disconnect here that continues to make me think you may have messed up your calculations about the taxable income from your Roth CONVERSION.

The 8606, Part I, is filed when either of the following happens:

1. You make after-tax contributions to a traditional IRA or roll same into the IRA from an employer plan.
2. You take a distribution from your traditional IRA. Conversion to Roth is treated as a distribution for these purposes.

You report a conversion to Roth in Part II of the 8606. In no case do you report Roth contributions.

If you converted a portion of your traditional IRA assets to Roth, given the fact that at some time in the past you made nondeductible contributions to the traditional IRA, a portion of the converted amount is taxable and a portion is a return of after-tax contributions. You do that calculation in Part I of the 8606, then carry the taxable amount to Part II.

Roth contributions are not reported on the 8606.

They might be reported on the 8880, retirement savers credit.

I agree with the possible disconnect.

snipped-for-privacy@panix.com (Arthur Kamlet) wrote in news:gdnkq8$tl$ snipped-for-privacy@reader1.panix.com:

I need to pay attention to my return when all this is playing out. Thanks for the heads up, Arthur, Phil, and Mark (hope I didn't forget anyone, but thanks to you too!)