2010 Nondeducible IRA Roth Conversion | Ed Slott and Company, LLC

2010 Nondeducible IRA Roth Conversion

I understand that if I convert a nondeductible IRA to a Roth in 2010 and have other IRAs I will have to assume that the conversion is coming pro rata for the entire total. For example, suppose my nondeducible IRA was worth $25,000 in 2010 of which $20,000 was nondeducible contributions. Also assume as of 2010 I also have $100,000 in a regular IRA. When I convert the nondeducible IRA do I assume the $25,000 is coming pro rata from my total IRA or would I owe tax on tha $5,000 in investment gain in the nondeducible account alone. Thanks for your answer.

You are correct in that the conversion is taxed pro rata based on the total value of all TIRA accounts which also includes any SEP and SIMPLE IRA's. You cannot selectively convert only your nondeductible IRA's. This is all worked out on Form 8606, which should also have been filed for years when nondeductible contributions were made to establish your basis. In your example the $20,000 basis would be divided by the total value as of 12/31/2010 of all your TIRA's plus the converted amount. $20,000/$125,000 = 16%. Therefore 16% of any conversion would be tax free. You also have the option to spread the tax over the following two years with no tax in 2010. Or you may want to convert smaller amounts in 2010 and following years and be taxed as you convert in each year. Ed C.
 

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