Such commingled IRA money also happens when a worker leaves a job and rolls money from an employer retirement plan, such as a 401(k), 403(b), SEP or Keogh account, into an existing traditional IRA instead of putting the money in a separate, dedicated, traditional retirement account.
Since the money in these company plans was not previously taxed, the IRS will collect on it when it is converted to a Roth account.
Figuring out the IRS bill
Ideally, Janet and other IRA holders with commingled accounts have regularly filed Form 8606. This tracks your IRA basis, the nondeductible portion of an IRA, and this amount isn't taxed upon conversion because taxes were paid on the money before it was contributed.
With equity investments in taxable accounts, account holders generally keep track of the shares they purchase so they can specify for tax purposes which shares to sell. This allows them to designate older shares, which will then qualify for lower long-term capital gains rates.
If you keep good IRS contribution records and know your basis, can you use a similar approach? Can you designate only already-taxed money to be converted so as to avoid, at least for the year of that conversion, a tax bill?
"The short answer is no," says Rucci. "You have to effectively allocate your basis in the account to any and all rollovers."
What if you have two traditional IRAs, one that's fully deductible and the other that is only partially deductible? Can you opt to convert only the already taxed money in the partially deductible one?
Again, you're out of luck. Tax laws say all traditional IRAs must be considered as a single account.
"You have $50,000 in each," Rucci says. "In the nondeductible account, you have a basis of $30,000, that is, $30,000 in contributions that you did not deduct. You must allocate that $30,000 to both traditional IRAs, at 50 percent each, even if you're only converting the deductible amounts. So you get $15,000 of basis in both.
"The tax laws will not give you 100 percent of basis on converting just the traditional nondeductible IRA contributions," says Rucci. "In other words, you can't take the nondeductible money as a distribution off the top. They allow you to recoup your basis proportionate to the rollover you're making.
"It's an important thing to keep in mind," he says, "because it could be expensive."
It also can be complicated. So if your traditional IRA is, like Janet's, an amalgam of contributions, you probably should speak to an accountant or other tax adviser before converting.
Conversions can pay off
Don't let potential conversion intricacies scare you away from converting, say experts. It still could be worth the effort and upfront tax costs.
The key to consider here, says Rucci, is your time frame.
"The Roth works best when you grow your money over a period of time so that it exceeds the amount of the taxes that you paid when you put the money in," says Rucci.
"If you're 60 years old and want to convert to a Roth, ask yourself, 'Does it make sense to convert if your life expectancy is only another 20 or 30 years?'"