Covert non-deductible IRA to Roth

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rsgdmd
Posts: 21
Joined: Sun Dec 30, 2012 1:59 pm

Covert non-deductible IRA to Roth

Post by rsgdmd »

So I am wondering about converting non-deductible (after tax) IRA to Roth IRA. I am 62, retired & have 4 separate retirement accounts -

a SEP-IRA (from before my business had a retirement plan),
a rollover IRA (from when I retired & closed the business's 401k/profit share plan),
a Roth IRA (from Roth contributions (when I had a SEP) & rolled over Roth 401k contributions),
and a non-deductible IRA account (contributions made (after tax) while had SEP).

Since the moneys were never combined (non deductible always in own account), is there any way to roll from the non-deductible account and convert into Roth or would still need to use the pro rata rule? TIA
livesoft
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Joined: Thu Mar 01, 2007 8:00 pm

Re: Covert non-deductible IRA to Roth

Post by livesoft »

You would still need to use the pro-rata rule as the IRS and everyone else considers that you have one single non-Roth IRA aka traditional IRA.
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lakpr
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Re: Covert non-deductible IRA to Roth

Post by lakpr »

Unfortunately, no. In the eyes of the IRS, all the IRAs you have are one big giant IRA (includes the non-deductible portion). When you convert to Roth, it will be deemed a proportional conversion of deductible and non-deductible IRA balances, and IRS expects tax on the conversion of deductible portion.

It is as if you mixed water and milk, and out of this mixture you transferred two gallons to a different container. What proportion of that liquid in the new container is water, and what proportion is milk?

You may want to consider a part time job in a company like Home Depot (assuming they are hiring, of course), which has excellent 401k plan, you will be eligible to participate relatively soon, and I believe it will also allow rollover of other pre-tax assets. Then roll over your pre-tax IRA including SEP to the 401k plan, then convert the remainder.

Personally, too much work ...
Topic Author
rsgdmd
Posts: 21
Joined: Sun Dec 30, 2012 1:59 pm

Re: Covert non-deductible IRA to Roth

Post by rsgdmd »

I'm the OP. Kind of thought that. Will I run into similar issues when I start taking money out of the accounts as distributions?
livesoft
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Re: Covert non-deductible IRA to Roth

Post by livesoft »

rsgdmd wrote: Tue Sep 15, 2020 1:13 pm I'm the OP. Kind of thought that. Will I run into similar issues when I start taking money out of the accounts as distributions?
If you mean will you have to fill out Form 8606 when you withdraw money and apply the pro-rated rule then: Yes, you will. I suppose you could just pay tax again on the past non-deductible contributions though.
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DSInvestor
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Re: Covert non-deductible IRA to Roth

Post by DSInvestor »

Are you fully retired? If you have some side gig like a little consulting, you may be eligible for a self employed retirement plan like Solo 401k. If so, you would be able to rollover the non-Roth IRA assets to your solo 401k to isolate the basis (non-deductible contributions). Once the basis has been isolated, you can convert just the basis to Roth IRA at no tax cost and you will forever avoid the IRA basis proration on your future IRA withdrawals and/or conversions.
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MrDrinkingWater
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Re: Covert non-deductible IRA to Roth

Post by MrDrinkingWater »

Did you use tax-preparation software last year? If you did, maybe you can try running a test case (using your Tax Year 2019 software) of doing a conversion of that traditional IRA with the non-deductible contributions to a ROTH IRA.

You can figure out what numbers go into which fields on the questions that your tax software poses to you, and you can use the "Go to Forms" mode to see what the Form 8606 looks like when it is filled out correctly.

Doing a test case won't be perfect, but it will probably be good enough to give you an idea about what you should expect when doing your taxes for Tax Year 2020.
retiredjg
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Joined: Thu Jan 10, 2008 12:56 pm

Re: Covert non-deductible IRA to Roth

Post by retiredjg »

Agree with the others. In the eyes of the IRS, you have a Roth IRA and a traditional IRA with some basis.

Any time you take money out of the traditional IRA (to spend or to do a Roth conversion), the tax will be pro-rated based on how much of that entire account has already been taxed.

Don't despair, this is not a big deal. It is a simple calculation each tax day. Instead of paying tax on all of it, you'll pay tax on a percentage of it. This will continue until the entire IRA is gone (meaning the SEP, the Rollover and what you think of as your non-deductible IRA).

All this assumes you have already filed the Form 8606 each year you made non-deductible contributions. Or, if you have not, that you can reconstruct those contributions and send in the forms now.
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