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Early in 2002, I made a $3000 contribution to my traditional ira.

Late 2002, I was covered by employer retirement plan.

If I convert the entire balance of the traditional ira to a Roth, should I consider the $3000 (02) contribution to be a nondeductible contribution?

If this contribution is nondeductible then it is added to my basis?


Yes, it's added to your basis. But I don't think that you really want to convert your traditional IRA. Semantics are important here.

If you convert your traditional IRA to a Roth, you would treat the original contribution based on your income and your coverage by an employer's retirement plan. If you deduct the traditional IRA contribution, then you have to recognize the entire balance in the IRA as income on the date you convert, assuming that you have never made any non-deductible contributions in the past. If you don't deduct the contribution, you would only recognize as income any increase in the IRA since the contribution was made earlier in the year, assuming that you have no other traditional IRA accounts.

Those assumptions are rather big ones, but if you meet them both, then it won't really matter whether you deduct your traditional contribution or not. Essentially, you'll pay tax on any earnings in the account since the contribution was made.

But I think what you really want to do is recharacterize your contribution as a Roth contribution. This gets you a different result. It treats the contribution as if it had always been to a Roth IRA. By recharacterizing, you won't have to pay tax on any of the earnings in the IRA since the original contribution.

This would also be important if you have another IRA account besides this one. Assuming that you make too much to deduct a traditional IRA, then you would have no choice but to make a non-deductible traditional IRA contribution. Then if you convert this IRA, you would have to pick up a prorated portion of all of your IRA accounts. You would get no deduction, but you would only recover a portion of the $3000 non-deductible contribution. You'd pay tax on more than just the earnings in this account.

--Peter
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