Roth Conversion Rules for Regular Non Deductible IRAs

by Mark Kennan

A Roth IRA conversion is an attractive option if you expect to pay a higher percentage of your income in taxes at retirement than in the current year. The conversion becomes even more attractive if your traditional IRA contains nondeductible contributions. Those contributions are converted tax free and your future earnings can eventually be taking out without being taxed.

Conversion Methods

You can use either a transfer or a rollover to convert money from a traditional IRA containing nondeductible contributions to a Roth IRA. A trustee-to-trustee transfer involves the financial institution holding the traditional IRA assets will transfer those assets to a Roth IRA at another financial institution. A same trustee transfer occurs when you have your financial institution convert the money from a traditional IRA to a Roth IRA at the same institution. A rollover occurs when you take a distribution and make a deposit within 60 day of the money into a Roth IRA. Typically, a transfer is easiest because you do not have to worry about the money being deposited on time.

Taxable Amount

Nontaxable conversions in your traditional IRA that you convert to a Roth IRA do not count as taxable income. If you are converting your entire traditional IRA to a Roth IRA, you can easily determine the nontaxable portion because it equals the total nondeductible contributions in the account. However, if you only convert part of it, you have to figure the percentage that the nondeductible contributions make up, and then figure the equivalent percentage of the conversion. For example, if nondeductible contributions make up 27 percent of your traditional IRA, 27 percent of your conversion is tax free.

Tax Reporting

When you perform a Roth IRA conversion, you have to report it on your taxes properly to make sure you only pay taxes on the applicable amount. First, complete Form 8606 to determine the taxable portion of the conversion, and attach Form 8606 when you file your income taxes. Next, report the total conversion on line 15a of Form 1040 and the taxable portion on line 15b. Only the amount on line 15b counts as taxable income for the year.

Future Tax Benefits of Converting

When you have nondeductible contributions in a traditional IRA, you do not have to pay income taxes when you take out those contributions. However, you must include any earnings on those nondeductible contributions on your income taxes. When you convert the money to a Roth IRA, the future earnings on the conversion do not count as taxable income when you take distributions, as long as the Roth IRA is at least five tax years old and you are at least 59 1/2 years old.

About the Author

Mark Kennan is a writer based in the Kansas City area, specializing in personal finance and business topics. He has been writing since 2009 and has been published by "Quicken," "TurboTax," and "The Motley Fool."

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