The Motley Fool Discussion Boards

Previous Page

Financial Planning / Tax Strategies


Subject:  Re: IRA to Roth Taxable? Date:  2/29/2016  5:08 PM
Author:  aj485 Number:  123702 of 131364

I had someone do my taxes this year. I put $5500 into a traditional IRA and converted it to a Roth. I did this because my wife and I are currently filing as "married filing separately" which essentially eliminates Roth contributions without doing the IRA to Roth conversion method.

Do you have ANY other IRAs that have pre-tax contributions/gains, like a rollover IRA?

If so, you can't convert ONLY the after-tax portion - it has to be pro-rated across the entire value of all your IRA accounts. That calculation would be done on Form 8606.

If not, I would ask if you told your preparer specifically you made a $5500 after-tax contribution and that the 1099-R that you provided was due to a conversion, and was not a withdrawal.

The tax preparer put the distribution on line 15b which is then added to my total income on line 22.

The entry for line 16b for conversions should come from Form 8606 - so what does your Form 8606 say? Look for Part II - that's the part that has to do with conversions. Do you agree with the amounts in that section?

If you didn't get an 8606, then I would suggest asking your preparer why not. If you didn't tell the preparer that you made a $5,500 after-tax contribution to a traditional IRA and then did a $5,500 conversion, they would not have known to prepare an 8606 for you. (That said, they should have asked about the 1099-R,and why you got it.)

It seems like this would result in double taxation. The money I put into the IRA was for tax year 2015 and was money I earned in 2015. I simply use the IRA as the go between to get to the Roth and since I did not take a deduction for the money put into the IRA, why should I be taxed on it again? It's post tax money put into my IRA converted to a Roth and no deduction was taken on any money put into the IRA.

Assuming the preparer filled out the 8606 correctly, it's not double-taxation. If you have other IRA balances, you will be taxed on a pro-rata basis. So, if your total IRA balance in all non-Roth IRAs (including the after-tax contribution that you made) was $55,000 when you made the conversion (so you had a remaining balance in ALL your IRA accounts of $49,500), 10% of the conversion ($550) would be non-taxable and 90% ($4,950) would be taxable. Your remaining $49,500 IRA balance would now have $4,950 in after-tax basis, and $44,500 in pre-tax funds.

That basis will be used in the future to reduce your taxes when you make withdrawals. Let's say in 25 or 30 years, when you are ready to start making withdrawals, you haven't put any other after-tax money into your IRAs, only pre-tax, and your balance has grown to $495,000. You still have the $4,950 basis, or 1% of the balance. So, if you withdraw $10,000, you will be taxed on 99% of it, or $9,900.

Copyright 1996-2020 trademark and the "Fool" logo is a trademark of The Motley Fool, Inc. Contact Us