Q. How should I go about treating the earnings on my non-deductible contributions? Are they taxable or not?
A. They are all taxable
It's best explained by example. Let's say you have $10,000 in all your existing traditional IRAs (including any rollover IRAs). You convert it ALL to a Roth IRA. That $10K consisted of $3,000 in deductible contributions, $2,000 in previous non-deductible contributions and $5,000 in earnings (interest, dividends & capital gains). Your basis, in all your IRAs, is $2,000. Only 20% of the $10,000 conversion ($2000) will be tax free . TurboTax will divide that $2,000 basis by the $10,000 conversion to arrive at the 20% tax free ratio. $$8000 of the conversion will be taxable.
If you don't convert all of your Traditional IRA to a Roth IRA, the calculation is a little different. Again, using an example:
Let's say you have a $4,000 balance in all your existing traditional IRAs on 12-31-22 and earlier in 2022 you converted $6000 to Roth. Your balance for the year was $10,000 (the 4000 on hand at year end plus the 6000 you converted). That balance consist of $3,000 in deductible contributions, $2,000 in previous non-deductible contributions and $5,000 in earnings (interest, dividends & capital gains). Your basis, in all your IRAs, is $2,000. Only 20% of the $6000 conversion ($1200) will be tax free . TurboTax will divide that $2,000 basis by the $10,000 balance to arrive at the 20% tax free ratio. $4,800 of the conversion will be taxable.
