How to Calculate Taxes on an IRA Rollover to a Roth IRA

by Mark Kennan

Whether you use a tax-deferred, traditional IRA, or an after-tax, Roth IRA the Internal Revenue Service (IRS) gets to tax the money at some point. Rolling over money from a traditional IRA to a Roth IRA makes sense if think your income tax rate for the present year will be lower than when you take the distributions. Essentially, by rolling over the money, you lock in your present year's tax rate instead of waiting to pay whatever your tax rate is in retirement. However, you may be able to avoid some of those taxes if your traditional IRA contains nondeductible contributions, which are contributions you did not deduct from your income taxes when you made the contributions.

Divide the amount of nondeductible contributions in your traditional IRA by the total value of your traditional IRA to find the nondeductible percentage of your account. If your traditional IRA has no nondeductible contributions, your result will be zero, meaning the entire Roth IRA conversion counts as taxable income. For example, if your traditional IRA has $31,000 of nondeductible contributions and the total account is worth $100,000, 31 percent of your traditional IRA is nondeductible.

Subtract the nondeductible percentage from 100 to find the taxable percentage of the account. For this example, subtract 31 from 100 to find that 69 percent of your conversion is taxable.

Multiply the taxable percentage of your rollover to a Roth IRA by the amount of your rollover to find the amount of additional taxable income resulting from the rollover. In this example, if you roll over $35,000, multiply $35,000 by 0.69 to find the $24,150 of the rollover counts as taxable income.

Multiply the taxable portion of your rollover from the traditional IRA to the Roth IRA by your income tax bracket to calculate the additional tax you owe as a result of your rollover to a Roth IRA. You can find the tax rate schedules for the current year in IRS Publication 17. Completing this example, if your income tax bracket equals 34 percent, multiply $24,150 by 0.34 to find you will owe an extra $8,211 in taxes for the year.

Items you will need

  • IRS Publication 17

Photo Credits

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