When you rollover money from a traditional IRA to another traditional IRA, or from a Roth IRA to a Roth IRA, you do not incur any taxes because the money stays in the same account type. When you roll money from a traditional IRA to a Roth IRA, however, you convert the money from a pretax account to an after-tax account, so the Internal Revenue Service requires you to pay taxes on the pretax money. If you made any nondeductible contributions, you can reduce your taxable income resulting from the conversion.
Divide nondeductible contributions in your traditional IRA by the total value of the traditional IRA to find the nontaxable percentage of your traditional IRA rollover. If you have no nondeductible contributions, 100 percent of your rollover from a traditional IRA to a Roth IRA is taxable. However, if, for example, you have $28,000 of nondeductible contributions and your traditional IRA is worth $200,000, 14 percent of your rollover is nontaxable (28,000/200,000 = 0.14).
Multiply the nontaxable percentage of your rollover by your rollover dollar amount. In this example, if you rolled over $40,000 from your traditional IRA to your Roth IRA, multiply $40,000 by 0.14 to find that $5,600 of your rollover is not taxable.
Subtract the nontaxable portion of your traditional IRA to Roth IRA rollover from the total amount to find the taxable portion. In this example, subtract $5,600 from $40,000 to get $34,400 as the taxable portion.
Find your total taxable income in the tax rate schedules for your filing status in IRS Publication 17 to determine your marginal tax rate. If adding the taxable portion of the Roth IRA conversion to your total taxable income puts you in a higher tax bracket, use the lower tax rate for the amount of the conversion needed to reach the top of the tax bracket and the higher tax rate for the remainder of the conversion. For this example, if you fall in the 23 percent tax bracket and are $14,400 below the 26 percent tax bracket, you would multiply $14,400 by 0.23 to get $3,312 and $20,000, the remainder of your conversion, by 0.26 to get $5,200, for a total conversion tax of $8,512.
- In addition to the other requirements to take a qualified distribution, you must wait at least five years from the date of the conversion before you can take a qualified distribution of the converted money.
Items you will need
- IRS Publication 17
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