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Can an individual convert ( to a Roth IRA) only the nontaxable amounts in his traditional IRA?
Last Updated September 20, 2011
Q: An individual has two traditional IRAs and a SEP IRA. The SEP IRA has only pre-tax amounts, as it was funded with only SEP employer contributions. One of the traditional IRAs includes rollovers of pre-tax amounts from a profit sharing plan, and the other holds nondeductible IRA contributions made over the years.
A. No. For purposes of determining the taxable portion of a Roth IRA conversion or a distribution from an individual’s traditional IRA, SEP IRA or SIMPLE IRA, all of the individual’s traditional IRAs, SEP IRAs and SIMPLE IRAs are treated as one account, and the amount converted to a Roth IRA or otherwise distributed from any of those accounts include prorated pre-tax and post-tax amounts. Let’s look at an example:
TJ has the following accounts:
- Traditional IRA # 1 with $20,000 post-tax amounts
- Traditional IRA # 2 with $50,000 pre-tax amounts
- SEP IRA with $30,000 pre-tax amounts
Total = $100,000
TJ converts Traditional IRA # 1 ($20,000 balance) to his Roth IRA.
For tax purposes, the conversion includes $4,000 post-tax (nontaxable) amounts and $16,000 pre-tax (taxable) amounts, determined as follows:
- Total IRA balance : $20,000 + $50,000 + $30,000 = $100,000
- Nontaxable balance is 1/5 or 20%: $20,000/$100,000= 1/5 [nontaxable/taxable]
- Nontaxable Converted amount is : $20,000 x 1/5 (or 20%)=$4,000
- $16,000 will be taxable
Question answered by Denise Appleby