Tax consequences in liquidating non-deductible IRA
When I first heard about the removal of the $100,000 income cap in 2010 for IRA conversions to Roth IRA, I immediately had several clients set up nondeductible IRAs that we would convert in 2010. I was thinking we would only pay taxes on the growth of the accounts at the time of the conversion. It seems I was premature because they have other Deductible IRAs and SIMPLE IRAs. They forgot to tell their tax preparer that they had opened nondeductible IRAs in 2006 so Form 8606 was not filed and nothing has been entered on any of their tax returns. Now that we know that if they do convert in 2010 the nondeductible IRA will be prorated with all of their other taxable IRA accounts, so: HOW DO WE TERMINATE THE NONDEDUCTILE IRAS WITHOUR PAYING TAXES ON THE WHOLE THING? What is the best way to solve this problem?
Permalink Submitted by Alan Spross on Tue, 2008-04-29 22:02
There is no way to solve the pro rating requirement whenever the conversion is completed. All that can be done with the 2006 non deductible contributions is to file Form 8606 reporting the added basis to their TIRAs to avoid double taxation. There is no way to get the contributions back without a distribution pro rated for the correct amount of basis.
If there are 2007 non deductible contributions, Form 8606 can be filed as above or because the extended due date of 10/15/08 is still in the future, the 2007 contribution can be returned with allocated earnings.