How to Calculate the Taxable Amount of a Roth Conversion

by Mark Kennan

Converting a traditional IRA to a Roth IRA allows you to pay taxes at your current rate rather than the rate you'll pay at retirement. In addition, unlike traditional IRAs, Roth IRAs do not require minimum distributions. If you made no nondeductible contributions to your traditional IRA, the entire amount of the Roth IRA conversion is taxable and you have no need to perform any calculations. However, if you did make nondeductible contributions, you need to compute the taxable portion of your Roth conversion to make sure you do not overpay in taxes.

Add the amount of nondeductible contributions made to your traditional IRA each year to find the total nondeductible contributions made to your traditional IRA.

Add the value of any nondeductible contributions withdrawn, if any, over all of your withdrawals from the traditional IRA.

Subtract the value of any nondeductible contributions withdrawn from your total nondeductible contributions made to find the total nondeductible contributions remaining in the account. For example, if you made $23,000 in nondeductible contributions but have already taken out $3,000 of nondeductible contributions, you have $20,000 in nondeductible contributions remaining in the traditional IRA.

Divide the amount of nondeductible contributions by the total amount in your traditional IRA at the time of the conversion. In this example, if at the time of conversion your traditional IRA has a value of $50,000, divide $20,000 by $50,000 to find that 0.4, or 40 percent, of your account is composed of nondeductible contributions.

Multiply the percentage of nondeductible contributions in the account by the amount of your Roth IRA conversion to find the nontaxable amount. In this example, if you converted $19,000, multiply $19,000 by 0.4 to find that $7,600 is tax-free.

Subtract the tax-free portion of the Roth conversion from the total amount to find the taxable amount of the Roth conversion. Completing the example, subtract $7,600 from $19,000 to find that $11,000 of the Roth IRA conversion is taxable.

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