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Greetings, Kath, and welcome. You wrote:

<<I had the same idea after my broker explained the loss (penality) I would incur for moving "tax deductible IRA dollars". I did a lot of reading and came up with the same idea. Split it up. I felt there had to be a way to end up with "tax-free interest" on more than just future Roth funds, somehow, without penalty. Sure enough, I proposed moving only those dollars that were nondeductible. Since moving the earnings would result in a penalty on them, (which might break even in the end) I decided that I prefer to do more than break even and leave theearning where they are. With several years of "nondeductible ira funds" moved over, I will end up with a lot more take-home money over the long haul. The interest on the original IRA as well as the earnings this account has already earned, will keep growing and I'll pay taxes on it upon withdrawal. But, those taxes will be at an even lower tax rate when you consider that the Roth funds will be nontaxable, earnings and all. What a deal!!!>>

What a deal is right! Sadly, it's a very bad one for you. As Glory11 points out, your premise is totally incorrect and you will be taxed on part of that distribution. The example cited shows you how that happens. You should also see Form 8606 and its instructions to see how that transfer will result in taxable income to you.

Fortunately, there is a remedy if you act in time. You have until 4/15/99 to "undo" that transaction and avoid any tax impact. All you have to do is notify your old traditional IRA custodian and the new Roth IRA custodian in writing that you wish to recharacterize that transfer as a transfer to a traditional IRA instead of a transfer to a Roth IRA. You must include the amount of the original transfer, the date of and for what tax-year the transfer took place, and an instruction to the Roth IRA custodian to transfer everything in that account via a trustee-to-trustee transfer to the new traditional IRA. The original distribution from your old IRA will then be considered a nontaxable rollover to another traditional IRA, and your problem will be solved.

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