The non-deductible contributions cannot
be converted in isolation from any other existing traditional and rollover
IRA(s). It's best explained by example. Let's say you have a $10,000 balance in
all your existing traditional IRAs and 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. This year you convert $5000 to a Roth. Only 20% of the $5000
conversion ($1000) will be tax free . TurboTax will divide that $2,000 basis by
the $10,000 balance to arrive at the 20%
tax free ratio. $4,000 of the conversion will be taxable. This is the way the IRS requires it to be done. The
calculations will be shown on form 8606.
