Taxable Portion: If you have made nondeductible contributions to any Traditional IRA in the past, to determine the taxable portion of your conversion amount you have to aggregate the value of all of your Traditional IRA accounts, then determine the proportion that is taxable or tax-exempt.
- Taxable portion = deductible contributions and any earnings (on both deductible and nondeductible amounts) divided by the total of your Traditional IRA balances
- Tax-exempt portion = total amount converted minus the taxable portion
Part of the conversion may be taxable and part may be nontaxable. You must use IRS Form 8606 to determine how much of the distribution from your Traditional IRA is taxable and how much is nontaxable. You cannot choose to convert only nondeductible contributions in order to avoid taxes on the conversion. Important: This proportion must be recalculated and is very likely to change with each subsequent conversion.
Example of deductible versus nondeductible Traditional IRA amounts:
You would like to convert a nondeductible Traditional IRA to a Roth IRA. The nondeductible IRA is a separate account with a balance of $25,000 and does not have any earnings. You also have a number of other Traditional IRAs totaling $225,000. Together, all your IRAs total $250,000.
The calculation to determine the conversion amount that is tax-exempt must include all IRAs, not just the nondeductible IRA.
- $25,000/$250,000: Only 10% of the converted amount will be tax-exempt, the other 90% will be taxable. (If there were no nondeductible contributions, 100% of $25,000 converted would be subject to ordinary income taxes.)
- The converted amount of $25,000 will be 10% tax-exempt and 90% taxable even though you are choosing to convert just the nondeductible IRA.
|Type||Amount||Proportion of Total IRA Amount||Breakdown of $25,000 Converted Amount|
|Nondeductible IRA||$25,000||10%||10% or $2,500 is tax-exempt|
|Deductible IRAs||$225,000||90%||90% or $22,500 is taxable|
|Total IRA Amount||$250,000||100%|