Converting Nondeductible IRA Contributions to Roth

I recently read your discussion of the rules for converting money in a traditional IRA to a Roth. I realize that most people deduct contributions to their traditional IRA and, upon converting to a Roth, they must pay taxes on those contributions. But what about nondeductible contributions you make to a traditional IRA?

6 Savvy Moves to Stretch Your Retirement Savings

You’re right that the tax situation is very different depending on how you’ve made your contributions. If all of your IRA contributions are tax-deductible, then the calculation is simple: The entire conversion is taxable. But if some of your contributions are nondeductible, the calculation gets trickier. In that case, you don’t have to pay taxes on the portion of the conversion that was from nondeductible contributions because you have already paid taxes on that money.

But you can’t cherry-pick which money to convert. If you convert only part of the money in your IRAs, the tax bill is based on the ratio of your nondeductible contributions to the total balance in all of your traditional IRAs. If, for example, you made $2,000 in nondeductible contributions and you have $10,000 in your traditional IRAs, then 20% of your conversion would be tax-free.

From just $107.88 $24.99 for Kiplinger Personal Finance

Become a smarter, better informed investor. Subscribe from just ~~$107.88~~ $24.99, plus get up to 4 Special Issues

CLICK FOR FREE ISSUE

https://cdn.mos.cms.futurecdn.net/flexiimages/y99mlvgqmn1763972420.png

Sign up for Kiplinger’s Free Newsletters

Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.

Profit and prosper with the best of expert advice - straight to your e-mail.

It’s also important to keep this rule in mind if you earn too much to contribute to a Roth IRA and want to make a nondeductible contribution to a traditional IRA and immediately convert it to a Roth (see Getting Around Income Limits for a Roth IRA). If it is your only contribution to a traditional IRA, you’ll pay taxes only on the earnings between the time of the contribution and the conversion. But if you’ve made tax-deductible contributions to an IRA, then the tax-free portion of the conversion is based on the ratio of your nondeductible contributions to your total IRA balance.

As the "Ask Kim" columnist for Kiplinger's Personal Finance, Lankford receives hundreds of personal finance questions from readers every month. She is the author of Rescue Your Financial Life (McGraw-Hill, 2003), The Insurance Maze: How You Can Save Money on Insurance -- and Still Get the Coverage You Need (Kaplan, 2006), Kiplinger's Ask Kim for Money Smart Solutions (Kaplan, 2007) and The Kiplinger/BBB Personal Finance Guide for Military Families. She is frequently featured as a financial expert on television and radio, including NBC's Today Show, CNN, CNBC and National Public Radio.