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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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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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[[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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Thank you, Roy and Bob.
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[[Thank you, Roy and Bob.]]

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TMF Taxes
Roy