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Author: rwenhold Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 121061  
Subject: Transferring after mony from IRA to Roth Date: 9/5/2000 9:48 AM
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My wife and I each have over $20,000 in after tax contributions to our IRA's (I have SEP, she has regular). It is my understanding that when we ultimately withdraw money from our IRA's, we must consider the after and before tax monies proportionately with each withdrawal (I think I'm correct with this undestanding). This being the case, when converting from our IRA's to a Roth IRA, must we also proportionately transfer before and after tax money, or can we keep the after tax money in our IRA's and transfer only pre-tax money? If I have options, is there any "better" way to handle the transferring??

I am currently 58 years old, and hope to retire in four years.

Thanks,
rwenhold
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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: 39582 of 121061
Subject: Re: Transferring after mony from IRA to Roth Date: 9/5/2000 7:49 PM
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<<My wife and I each have over $20,000 in after tax contributions to our IRA's (I have SEP, she has regular).>>

Just so we get our terms correct, when you say "after tax", that tells me that your contributions were NON-DEDUCTIBLE. If your contributions were deductible, they would normally be called "pre-tax".

Since there are no providison for non-deductible contributions into a SEP plan, I'm afraid that we may be talking about apples and hand grenades.

<< It is my understanding that when we ultimately withdraw money from our IRA's, we must consider the after and before tax monies proportionately with each withdrawal (I think I'm correct with this undestanding).>>

Basically correct. Allow me an example. Say that you had an IRA with a value of $50,000. Of the total IRA, $10,000 came from NON-DEDUCTIBLE contributions. Say you dedice to remove $30,000 from the IRA. 1/5 of the $30k distribution ($6,000) would be a non-taxable distribution of your original contribution. If you take distributions in later years, you would have to deal with the FMV of the IRA at that time, and use your remaining "basis" of $4,000 to make the correct computations at that time.

<<This being the case, when converting from our IRA's to a Roth IRA, must we also proportionately transfer before and after tax money, or can we keep the after tax money in our IRA's and transfer only pre-tax money? If I have options, is there any "better" way to handle the transferring??>>

Nope. You have to make the same computations. Use the same example above. But instead of taking a $30k distribution, you're making a $30k convertion to your Roth IRA account. Your taxable conversion income would be $24,000, and the $6,000 is simply a transfer of your proportionate share of basis into the Roth IRA. So you could convert $30,000 but only pay taxes on $24,000.

You can't cherry pick your "basis" off the top of the traditional IRA and transfer it first.

TMF Taxes
Roy

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