I recently read your discussion of the rules for converting money in a traditional IRA to a Roth. I realize that most people deduct contributions to their traditional IRA and, upon converting to a Roth, they must pay taxes on those contributions. But what about nondeductible contributions you make to a traditional IRA?
You’re right that the tax situation is very different depending on how you’ve made your contributions. If all of your IRA contributions are tax-deductible, then the calculation is simple: The entire conversion is taxable. But if some of your contributions are nondeductible, the calculation gets trickier. In that case, you don’t have to pay taxes on the portion of the conversion that was from nondeductible contributions because you have already paid taxes on that money.
But you can’t cherry-pick which money to convert. If you convert only part of the money in your IRAs, the tax bill is based on the ratio of your nondeductible contributions to the total balance in all of your traditional IRAs. If, for example, you made $2,000 in nondeductible contributions and you have $10,000 in your traditional IRAs, then 20% of your conversion would be tax-free.
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
It’s also important to keep this rule in mind if you earn too much to contribute to a Roth IRA and want to make a nondeductible contribution to a traditional IRA and immediately convert it to a Roth (see Getting Around Income Limits for a Roth IRA). If it is your only contribution to a traditional IRA, you’ll pay taxes only on the earnings between the time of the contribution and the conversion. But if you’ve made tax-deductible contributions to an IRA, then the tax-free portion of the conversion is based on the ratio of your nondeductible contributions to your total IRA balance.
-
Five FAQs About 529 College Savings PlansThanks to recent policy changes, families have more options for what to do with money sitting in tax-advantaged 529 accounts.
-
7 Best Places in the US for Wellness Tourism — Beyond CaliforniaCalifornia doesn't have a monopoly on wellness tourism. These U.S. retreats offer exercise, relaxation and good food in stunning scenery that might be closer to home.
-
Getting Out of an RMD Penaltyretirement When your brokerage firm miscalculates your required minimum distributions, you have recourse.
-
Borrowers Get More Time to Repay 401(k) Loans
retirement If you leave your job while you have an outstanding 401(k) loan, Uncle Sam now gives you extra time to repay it -- thanks to the new tax law.
-
It’s Not Too Late to Boost Retirement Savings for 2018
retirement Some retirement accounts will accept contributions for 2018 up until the April tax deadline.
-
How to Correct a Mistake on Your RMDs from IRAsretirement If you didn't take out the correct required minimum distribution because your brokerage firm made a mistake, the IRS may show some leniency.
-
Making the Most of a Health Savings Account Once You Turn Age 65
Making Your Money Last You’ll face a stiff penalty and taxes if you tap your health savings account for non-medical expenses before the age of 65. After that, the rules change.
-
Reporting Charitable IRA Distributions on Tax Returns Can Be Confusing
IRAs Taxpayers need to be careful when reporting charitable gifts from their IRA on their tax returns, or they may end up overpaying Uncle Sam.
-
Make the Most of the New Military Retirement Plan
retirement The government is offering a new retirement option so that service members who leave the military before qualifying for a pension can still receive some benefits.
-
How Changes in Income Affect Medicare Premiums
Medicare Medicare beneficiaries can see their premiums go up if their income rises, although for some that increase will be only temporary.
