$10,000 you can convert your entire Non-deductible IRA to a Roth IRA, and you'll only have to pay tax on the earnings portion.
Converting Nondeductible IRA Contributions to a Roth. Your tax bill on a Roth conversion will depend on the ratio of your nondeductible contributions to the total balance in all of your traditional IRAs. By Kimberly LankfordSee my bio, plus links to all my recent stories. , April 24, 2015 Reminder: IRS Form 8606 must be filed for any tax years that you distribute assets from your Traditional IRA if any of your Traditional IRA balances include non-deductible contributions. IRS Form 8606 is used to help you determine the taxable portion of your distribution or conversion. You may figure the taxable amount by using the following formula: (Total Deductible Contribution/Total IRA Balance) x Distribution/Conversion Amount = Non-Taxable Amount. Let's say you have non-deductible contributions of $8,000 in a Traditional IRA that have grown to $100,000. For example, if you previously made non-deductible contributions to your IRA of $8,000, the value of all of your traditional IRAs is $80,000, and you decide to convert $10,000, then 10% ($8,000 out of $80,000) of your conversion, or $1,000 ($10,000 x 10% = $1,000) is not taxed. If you are eligible, you can convert a traditional IRA or a 401(k) to a Roth IRA. Note, however, that you typically cannot convert a 401(k) to a Roth IRA while you are still working for the employer where your 401(k) is held. Converting IRA Basis. If you convert all of the money in a traditional IRA to a Roth IRA, your basis of nondeductible contributions is exempt from the taxes you pay on the remaining converted money. You can do a partial conversion. However, the IRS won’t let you convert only your IRA b If this is the case, then you can convert your entire Non-deductible IRA to a Roth IRA, and you'll only have to pay tax on the earnings portion. For example, Susan Smith is in a 30% tax bracket this year and she only has one IRA worth $100,000. The IRA consists of $90,000 in non-deductible contributions and $10,000 in earnings. If she decides to convert the entire IRA to Roth, she would only have to pay tax on the earnings portion ($10,000). At a 30% tax rate, she would owe $3,000 in tax to convert the entire $100,000 to Roth. If Smith had no earnings in this IRA, the entire $100,000 (all non-deductible contributions) could be converted with no tax liability. Deductible vs. nondeductible IRA contributions. In 2013, the maximum you can contribute to all of your traditional and Roth IRAs is the lesser of (a) $5,500 or (b) your taxable compensation for the year. If you're 50 or older, the limit is $6,500. You can make contributions to a traditional IRA until age 70-1/2. The nontaxable amount of your Roth IRA conversion would be equal to your conversion of $5,500 multiplied by a fraction equal to your nondeductible contribution of $5,500 divided by the total value of all of your traditional IRA accounts of $105,500, or 5,500 x $5,500/$105,500, or $287. If you have non-deductible contributions in your IRA, you do not pay tax on the amount of non-deductible contributions. If you make a partial conversion, you must prorate your deductible and non-deductible contributions to all IRAs (including SEP and SIMPLE IRAs) as of December 31 of the year you convert. If you wait for your $10,000 IRA with $5000 in non-deductible contributions to grow to $20,000 before converting, you pay tax on $15,000 rather than $5000, tripling the tax but only doubling the amount converted. If you previously made non-deductible contributions to your IRA or 401(k), then part of the amount you convert to a Roth IRA will not be subject to tax. Unfortunately, you can’t just take out the non-taxable portion. If you are eligible, you can convert a traditional IRA or a 401(k) to a Roth IRA. Note, however, that you typically cannot convert a 401(k) to a Roth IRA while you are still working for the employer where your 401(k) is held. You can convert the contributions to a Roth IRA; however, a portion of the amount you convert to the Roth will be subject to income tax. You may figure the taxable amount by using the following formula: (Total Deductible Contribution/Total IRA Balance) x Distribution/Conversion Amount = Non-Taxable Amount. Let's say you have non-deductible contributions of $8,000 in a Traditional IRA that have grown to $100,000.
http://www.kiplinger.com/article/taxes/T046-C001-S003-converting-nondeductible-ira-contributions-to-roth.html http://www.investopedia.com/ask/answers/197.asp http://retireplan.about.com/od/iras/a/convert.htm http://finance.zacks.com/traditional-roth-ira-conversions-nondeductible-ira-contributions-2754.html http://www.investopedia.com/articles/pf/12/roth-ira.asp http://www.marketwatch.com/story/backdoor-roth-ira-conversion-tax-free-2013-04-30 http://www.bogleheads.org/wiki/Roth_IRA_conversion http://retireplan.about.com/od/iras/a/convert.htm http://www.investopedia.com/ask/answers/197.asp
converting part of your non deductible contribution ira to a roth