Rolling into a Roth
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Dear Tax Talk,
Can I roll a traditional IRA to a Roth IRA? My traditional IRA contains after-tax contributions, due to high income that disqualifies me from taking the deduction on the 1040. This also requires filing IRS form 8606 annually. If I can roll the traditional IRA to the Roth, are only the growth and earnings from the funding subject to federal and state income tax, with the post-tax original contribution dollars not taxed again upon conversion?
Individuals who are covered by an employer plan can always make IRA contributions. However, if their modified AGI exceeds a certain threshold, they cannot take a deduction for the IRA. Form 8606 is required to be filed annually to keep track of nondeductible IRA contributions.
When distributions are made from an IRA that includes nondeductible contributions, a portion of the distribution is considered ordinary income and the remainder a recovery of basis, which is not taxed.
An individual can convert any IRA to a Roth IRA. A Roth IRA is a savings account on an after-tax basis that grows tax-free. A Roth IRA distributed after age 59½ is tax-free to the owner.
In order to convert to a Roth IRA, an individual’s modified AGI must be under $100,000. This limit applies whether or not there is an employer plan. Beginning in 2010, the $100,000 limit no longer applies.
Hence, if you could not previously deduct IRA contributions because of employer plan and AGI limitations, you may not be able to convert to a Roth until 2010 because of the $100,000 AGI limit. If you convert in 2010, you would be able to spread the tax over two years, beginning in 2011. The tax would be based on the earnings and growth, as the original contributions were not deducted.
To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Taxpayers should seek professional advice based on their particular circumstances.