Roth Conversion Tax Implications

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Gustie13
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Roth Conversion Tax Implications

Post by Gustie13 » Tue Dec 15, 2015 12:26 pm

Hello,
I've read the Roth Conversion Wiki, as well as some other Roth Conversion threads and websites but am still confused on the tax implications of a Roth Conversion in my situation.
I left my previous employer this year and was given the option to either 1) rollover the amount that was in my pension (roughly $18k), 2) take the amount as a lump sum, or 3) leave it with them in a money market account. I chose to take it as a rollover, and recently put it in a Traditional IRA.

If I do a Roth Conversion, will I owe taxes on the full $18k or just the gains (which will be zero since its just sitting in cash)?
The Wiki states "You pay taxes as if you withdrew the entire amount converted" but also "If you have non-deductible contributions in your IRA, you do not pay tax on the amount of non-deductible contributions". From there I'm stumped as I can't figure out if my contribution was non-deductible, even after reading the Non-Deductible Contribution Wiki. It was non-deductible from the standpoint that my income excludes me deducting Traditional IRA contributions, but on the flip side I haven't paid tax on them (since it was a pension rollover).

Any thoughts or advice on where to dig further?

kaneohe
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Re: Roth Conversion Tax Implications

Post by kaneohe » Tue Dec 15, 2015 12:49 pm

Where did the funds from the pension come from........from your paycheck before taxes? or the company's funds?? The company should be able to tell you.

livesoft
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Re: Roth Conversion Tax Implications

Post by livesoft » Tue Dec 15, 2015 12:53 pm

The funds are not non-deductible. You will add $18,000 to your AGI (adjusted gross income) on the first page of your Form 1040 if you convert $18,000 from this IRA to your Roth IRA.
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Gustie13
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Re: Roth Conversion Tax Implications

Post by Gustie13 » Tue Dec 15, 2015 2:03 pm

kaneohe wrote:Where did the funds from the pension come from........from your paycheck before taxes? or the company's funds?? The company should be able to tell you.
They were from the company's funds.
livesoft wrote:The funds are not non-deductible. You will add $18,000 to your AGI (adjusted gross income) on the first page of your Form 1040 if you convert $18,000 from this IRA to your Roth IRA.
Can you explain why? I'm curious what I missed.

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Artsdoctor
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Re: Roth Conversion Tax Implications

Post by Artsdoctor » Tue Dec 15, 2015 2:55 pm

Gustie,

Think of it this way. Money which makes its way to your pocket will be taxed. The question ultimately is when. (Forget about the concept of having so little income that you don't pay income tax; this is for illustration purposes.)

Whatever transfer you've done, ask yourself when taxes have been paid on that money. If this is money has never been taxed, ask yourself when the government is going to get its share.

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abuss368
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Re: Roth Conversion Tax Implications

Post by abuss368 » Tue Dec 15, 2015 3:02 pm

Hi Gustie13,

You will need to report the amount converted as income on your Form 1040 tax return. The additional schedule to complete if Form 8606.

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livesoft
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Re: Roth Conversion Tax Implications

Post by livesoft » Tue Dec 15, 2015 3:43 pm

Gustie13 wrote:
livesoft wrote:The funds are not non-deductible. You will add $18,000 to your AGI (adjusted gross income) on the first page of your Form 1040 if you convert $18,000 from this IRA to your Roth IRA.
Can you explain why? I'm curious what I missed.
You didn't miss anything. The money was never previously taxed, so it has to be taxed now. If you think you previously paid taxes on some of the money, show me the tax return or W-2 or both to prove that.

As others noted, the number on Form 8606 will flow to the first page of Form 1040. See the instructions for Form 8606. They are very short.
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Gustie13
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Re: Roth Conversion Tax Implications

Post by Gustie13 » Wed Dec 16, 2015 5:04 pm

Ok, got it now. I was hoping I'd stumbled upon a way to get tax-free retirement money. Thanks for everyone's help. :happy

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