Tax calculaton for Roth IRA conversion
I have 3 different IRA accounts—account 1 is set-up for after-tax traditional IRA contribution, account 2 is set-up for rollover IRA from previous employer 401K plan, and account 3 is SEP IRA. If I am going to convert all balance of account 1(after tax contribution) into Roth IRA, should the pro-rata rule apply to all 3 accounts or just the 1st 2 accounts? If so, suppose the total contribution for account 1 is X, the account value for account 1 is Y, the account value for account 2 is Z, is the calculation for taxable part correct? Thanks!
(Y-X) times X /Y+Z
Permalink Submitted by Alan Spross on Wed, 2010-09-15 03:44
The pro rata rule as generated on Form 8606 must include all owned TIRA, SEP IRA and SIMPLE IRA accounts. Therefore the taxable portion of your conversion is the same no matter which account you select to fund your conversion. The key requirement here is that you properly filed an 8606 for every year that you made a non deductible contribution. You also need to check to see if you rolled over any after tax contributions from the 401k and those after tax contributions also should be added into your 8606 form. Then just follow the form for the taxable % of your conversion.
The account values used are those at the end of the year the conversion is done with the conversion amount added back to that total as well as any other distributions taken during the year. Divide your total basis by that value to get the after tax % or subtract the after tax % from 100% to get the taxable percentage.
Permalink Submitted by Woan-Yi Byles on Wed, 2010-09-15 11:13
Thank you for the explanation. It is more complicated than I thought originally but I get it now.