converting IRA to Roth IRA

Hi,

I have contributed after-tax money into an IRA for a few years now, and I want to convert that IRA into a Roth.
Is it right to say that the gains from the after-tax money going to be taxed when I do that?

Do we just substract the after-tax contributions from the total of the IRA account to determine the amount that I would be taxed on?

If next year, I contribute again with after-tax money to the IRA, and I convert right away (no gain on that part of the money) to Roth, I would not need to pay any (additional) tax due to this conversion?

tj

If next year you have after tax money to contribute to an IRA, why not contribute directly to the Roth. No need to convert.

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thanks for your reply.

But if I open another IRA account with 0 balance. Can I convert immediately so I would not pay any tax for this particular conversion?

tj

"If next year you have after tax money to contribute to an IRA, why not contribute directly to the Roth. No need to convert. "

My current income situation does not allow me to contribute anything to the Roth directly.

But if I open another IRA account with 0 balance. Can I convert immediately so I would not pay any tax for this particular conversion?

No. When doing the math and completing the forms as explained above, you must add together all of your traditional IRA accounts. You can’t report them separately.

–Peter

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I have contributed after-tax money into an IRA for a few years now, and I want to convert that IRA into a Roth.

I would also point out that in order to document the after-tax basis in your T-IRAs, you should have been filing Form 8606 as a part of your tax return each year that you made an after-tax contributions. If you did not file those forms, you need to go back and file one for each year that you made the contribution, before you do a conversion.

Additionally, as previously indicated, taxes for conversions are based on the percentage of pre-tax money (gains and contributions) for all T-IRAs that you own, including, but not limited to, rollover, SEP and SIMPLE IRAs, even if those balances are spread across different accounts at multiple brokerages.

That said, if your goal is to just convert after-tax contributions, there is a way to get around being taxed on the pre-tax funds, if you have access to an employer plan, like a 401(k), you can roll the pre-tax money to. Since employer plans don’t accept after-tax money, you can roll all of the pre-tax money (i.e. gains and pre-tax contributions) into the 401(k). You will be left with a T-IRA that contains only your after-tax basis, which you can then convert and won’t owe any taxes on, assuming you have no gains. Since employer funds generally also only take cash, and you need to leave a specific dollar amount (your after-tax basis, plus any pre-tax amount that you might be willing to pay taxes on) in the IRA to be converted, you will probably have to sell all of your investments and go to cash for a while. And your 401(k) would also need to have investment choices and fees that you find acceptable. So you would have to determine if the tax savings will offset those issues for your particular situation. I know that for some people, it has proven worthwhile to be able to do the back-door Roth process without having to worry about paying taxes on part of the conversion.

AJ

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But if I open another IRA account with 0 balance. Can I convert immediately so I would not pay any tax for this particular conversion?

The basis for your IRA is across all of your IRA accounts.
Doesn’t matter if you open a new IRA with a different company from where you’ve had your other IRA accounts - as far as the IRS is concerned it’s all lumped together on form 8606.

To expand on Mike’s example:
You have an IRA with $200K, you’ve made $40k of after tax contributions over the years.
In 2022 you open a new IRA account with Ameritrade and make an additional $5k contribution after tax. (lets say your old accounts are with Schwab - not that it matters)

Now you convert the $5k at Ameritrade from IRA to Roth IRA.

When it comes time to fill out form 8606, I think you will have $205k value to the IRA, and a $45k basis.
$45k/$205k = 21.95%
So for the $5k you convert, $1097 will not be taxed, and $3903 will.

If it makes you feel better, the $3903 getting taxed hadn’t been taxed previously.

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Others have answered your question about opening another account. As part of the explanation for that IRA actually stands for Individual Retirement Arrangement, not Individual Retirement Account. That’s why all of you TIRA accounts are lumped together as part of your Arrangement.

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