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For the last two years I have made contributions to a traditional IRA but was not eligible for the tax deduction. Next year our household will see an income increase (my wife id returning to work) and I am considering converting my traditional account to a Roth before year end. My TD Ameritrade rep told me that he thinks I will have to pay tax on the amount rolled despite having paid the tax once already. I seem to recall being told otherwise last year when I inquired about this -- that the amount was recorded as a post tax contribution and therefore would convert without an additional tax liability.

Anyone know for sure?

Thanks.
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For the last two years I have made contributions to a traditional IRA but was not eligible for the tax deduction. Next year our household will see an income increase (my wife id returning to work) and I am considering converting my traditional account to a Roth before year end. My TD Ameritrade rep told me that he thinks I will have to pay tax on the amount rolled despite having paid the tax once already. I seem to recall being told otherwise last year when I inquired about this -- that the amount was recorded as a post tax contribution and therefore would convert without an additional tax liability.

There's a reason all brokerages tell you not to rely on them for tax advice, but in this case it's not my usual snarky "they don't know their butts from second base," but rather no broker can answer this specific question. They simply don't have enough information at hand. Nor do we.

So, do you have any other traditional IRA accounts, including rollovers, SEPs and SIMPLEs? Were any deductible contributions made to the account you're asking about?

Once we know that we can tell you the tax consequence of conversion.

Phil
Rule Your Retirement Home Fool
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Hi Phil,

Thanks for the quick response. I do hold a 401k and a Roth ira from previous years, but no other traditional iras or seps. For the last three years my only retirement contributions have been to a traditional IRA. In 2009 I put in $2000 which was deductible; then in 2010 $5000 which was not deductible; then in 2011 $5000 of which $350 was deductible. Its my understanding that I will owe some % of the $2350 for which I was not taxed, and that the amount owed is based upon the ratio of untaxed to taxed contributions currently in the account.

Also, I have set up two bull call spreads in the account and am not sure whether the sold calls will be treated as gains now or later when the spread is closed.

(My accountant friend suggested leaving the account alone so that I would later have the taxed $ in there to raise my cost basis and save on tax later. My feeling is that I hope to earn more later and my tax bracket will be higher (wishful thinking perhaps)).

Thanks for your help,

Ray
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401Ks and ROTH IRAs are not considered for the conversion.

The cost basis is prorated based on the value, not the ratio of untaxed contributions and taxed contributions.

You have a cost basis of $9,650 ($5000 + $4650).

I am assuming the current value is greater than the non-deductible contributions.

If you convert the entire balance, the taxable amount is:
TIRA value - $9,650.

If the entire amount isn't converted, the taxable amount is:

TIRA value - $9,650
------------------- X Conversion amount
TIRA value
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