Answers to Your Tax Questions

TurboTax Live Community is a place where you can learn and share with TurboTax experts and customers while preparing your taxes. Do your taxes with TurboTax to ask questions and get answers from the community for free.

Question

johnny190

Asked

How to do a partial conversion of an IRA to a Roth IRA

How do I do a partial IRA to Roth conversion with multiple Deductible and Non-deductible IRA's. I may make the maximum $100,000 Income requirment and will definately do this in 2010.

We have multiple IRA's at multiple brokerages some of which originated from pension conversions (which are sometimes called IRRA's). We also have multiple 401K and 403b's that are eligible to be converted to IRA's at any time. We have two non-deductible IRA's at one brokerage (one for my wife and one for me). My plan was to convert a portion of the IRA's in every year that we are eligible (to control the tax rate at 25%) but I am currently struggling with how to calculate the taxable amount since some of these IRA's have already had taxes paid on the principal. I am also a little confused because at will I can convert 401K's to IRA's which would seem to change the calculation. My long-time tax accountant was not helpful in answering this question which is one reason that I am using Turbo-tax this year (I like it). Will Turbo-tax help me with all these calculations and help me track the tax basis across these many accounts?
I have reviewed publication 590 and it does not seem to answer this partial conversion question. I am hoping to get an answer from the community and it is pretty clear that I will need to phone the IRS - I would just like to be as informed as a can for what I think will be difficult accounting, The answer I really want to hear from Turbotax is that they can track the cost basis (non-deductible contributions) as they are balanced across other accounts

(Asked 04/16/09, Views 11)

Question has been solved by TurboTaxDon

Answers (2) Comments (2)

TurboTaxDon

Pro

All of your IRA accounts are treated as one combined account. You only have one basis, and that is the total basis for all accounts. So, when you do a conversion, you can do the conversion from any account or combination of accounts you want, but you cannot use the individual basis in that particular account to compute the taxable amount. Regardless of which account you convert, your basis will always be the same, the combined basis of all accounts. The same is true of the year-end value of your IRA, it is the combined value of all of your IRA accounts.

You may not be interpreting the meaning of a partial conversion correctly. When you convert one of your accounts, you will get a Form 1099-R for that distribution, and it will not be a partial conversion, it will be a full conversion of the amount withdrawn. The fact that you have other accounts not converted is irrelavent.

(Posted 04/16/09)

Rating (0)

johnny190
Commented

Thanks Turbotax Don - I think you may be right regarding my confusion on the definition of a partial conversion.

This is my current understanding after reading your reply. If I convert a rollover IRA (which was never taxed) in its entirity into a Roth IRA this is considered a full conversion and it is irrelevant from the perspective of the other IRA's. EXCEPT - that I have to track the previously taxed contributions across all of my IRA's in order to calculate the taxes payable on the conversion. Thus if I understand this correctly - once I have converted a rollover IRA to a Roth IRA I will consume a percentage of the previously taxed principal (proportional to all of the IRA's) from my still existing non-deductible IRA. This seems slightly problematic in that the brokerage that has my non-deductible IRA is tracking the taxed contributions to this IRA and will not change this number unless an error can be proven. i.e. some of the taxable basis would change by my records and not theirs. This is just an agravation because I think I can keep perfect records to document what I have done.

And the second point of confusion that still exists - it seems to me if I have some previously taxed contributions in a non-deductible IRA - and that I intend to do IRA to Roth conversions over the next few years that it would be prudent to delay conversions of 401K's to IRA's so that when I do conversions of IRA's to Roth IRA's that I can capture the greatest amount of the previously taxed non-deductible IRA principal.

Can you add anything and do I have this correct? I must say that this seems sufficiently complicated (and the consequence of getting it wrong is double taxation on the nondeductible IRA) that it is very tempting just to skip it.

TurboTaxDon

Pro

Regarding your first paragraph, that is correct except the brokerage firm is not tracking your basis. They may be tracking your total contributions, but your basis is your nondeductible contributions, which the brokerage cannot know because they would have to have your tax returns for every year and got your basis from Form 8606. Basis in nondeductible contributions, not total contributions. Basis does not generally have any rollovers in it.

Second paragraph inplies that a 401(k) rollover because part of your basis, which it generally does not. The only effect of a rollover from a 401(k) would have is to increase your year-end value in your IRAs, which would increase the taxable amount of a conversion because you would not be recovering as much basis. The nontaxable amount is generally the basis divided by the sum of the year-end value and the amount of the distribution.

When you make a contribution (not including rollover contributions) to a traditional IRA, all of the contribution may be deductible, only part of the contribution may be deductible, or none of it may be deductible. It depends on whether you are covered by a retirement plan, such as a 401(k), at work, your filing status, and what your adjusted gross income is. When you made your IRA contributions (not including any rollover contributions), if they were deductible, they should appear on the IRA deduction line in the Adjusted Gross Income section of your Form 1040 for the year the contribution was made. If some or all of the contribution (not including rollover contributions) could not be deducted because of your adjusted gross income, then the part of the contribution that could not be deducted becomes your basis. This nondeductible part of your contribution should have been reported on Form 8606 in the year the contribution was made.

If you were able to deduct all of your regular IRA contributions (not including rollovers), then your basis is zero.

(Posted 04/17/09)

Solved

Rating (+ 10):