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Author: smdesai Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 121316  
Subject: Taxes on Roth Conversion Date: 12/16/1998 1:59 PM
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I have two IRAs; one has all nondeductible contributions, value (9K) of which is right now lower than the amount contributed (12K) and other has my 401K money (165K) rolled over from previous job. My question is : When I convert nondeductible IRA to Roth will I have to pay any taxes ? If so, can you suggest some reading material which shows how to go about calculating those taxes. What effect the amount in rollover IRA will have on taxes ?

Thank you,
Sanjay
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Author: bliles One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 7262 of 121316
Subject: Re: Taxes on Roth Conversion Date: 12/16/1998 2:15 PM
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smdesai said:

I have two IRAs; one has all nondeductible contributions, value (9K) of which is right now lower
than the amount contributed (12K) and other has my 401K money (165K) rolled over from
previous job. My question is : When I convert nondeductible IRA to Roth will I have to pay any
taxes ? If so, can you suggest some reading material which shows how to go about calculating
those taxes. What effect the amount in rollover IRA will have on taxes ?


Uncle Clinton considers all of your IRA's as one. To him, you have an IRA with $174k with a basis of $12k. That gives you a basis (nondeductible contributions) of 6.8966%. However much you convert to a ROTH, from whichever IRA, you will be taxed on 93.1034% of the conversion, and 6.8966% of the conversion will be deemed already taxed. It doesn't matter which IRA you convert.

Bob

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Author: TMFTaxes Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 7281 of 121316
Subject: Re: Taxes on Roth Conversion Date: 12/16/1998 8:32 PM
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[[I have two IRAs; one has all nondeductible contributions, value (9K) of which is right now lower
than the amount contributed (12K) and other has my 401K money (165K) rolled over from
previous job.]]

OK...got it Sanjay. But I can see where this is going, and I don't think you'll be happy with the answer.

[[ My question is : When I convert nondeductible IRA to Roth will I have to pay any
taxes ?]]

You may NOT carve out only the non-deductible portion of your IRA and convert just that IRA. The "agrigation" rules state that you must treat all of your IRAs as one big IRA...and spread your basis (if any) over all of your IRAs.

In your example, what you actually have it one big IRA with a value of $174k, and a basis of $12k. If you wanted to only make a partial conversion, your basis is required to be spread evenly over the entire IRA.

So if you wanted to make a partial convestion of (let's say $87k of your IRA, half of your basis would be spread to that conversion, and therefore $81k would be subject to conversion tax. And that percentage would hold for any partial conversion that you would want to make.

[[If so, can you suggest some reading material which shows how to go about calculating
those taxes.]]

You can read IRS Publication 590 for more information on the agrigation rules, and how to spread your tax basis. For more information on the tax issues regarding a Roth IRA conversion, you can read my series of posts on this very issue in the Taxes FAQ area (archives section).

[[ What effect the amount in rollover IRA will have on taxes ?]]

You'll lear much more about this issue when you read IRS Publication 590 and my post on the Roth IRA issues in the Taxes FAQ area. Check it out.

TMF Taxes
Roy

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Author: smdesai Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 7288 of 121316
Subject: Re: Taxes on Roth Conversion Date: 12/16/1998 9:05 PM
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Thank you, Roy and Bob.

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Author: TMFTaxes Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 7293 of 121316
Subject: Re: Taxes on Roth Conversion Date: 12/16/1998 9:44 PM
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[[Thank you, Roy and Bob.]]

And thank YOU!!!

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That's what we like to see...just a simple "Thanks" will take you only a few seconds, and may help to save a life.

If EVERYBODY who has posted a question in this folder would just stop by to say "thanks", just that simple little word, there would be over 2,000 posts, which would allow us to raise about $40 for SOS.

It may not sound like a whole lot, but multiply it by the other folders, boards, and posts. It can add up quickly.

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Stop by the Fool Taxe Strategies and just say "Hello" or "Thanks" or even "Happy Holidays".

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TMF Taxes
Roy

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