Retirement tax questions

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@imbhavik wrote:

HI,

 

I have been reading multiple posts online to see what option makes better for me.

 

I have some amount (e.g. $50,000) in IRA which I deducted for tax in the past years. I have $6000 in IRA which originally meant for deduction but it would be considered NonDeductible due to AGI limit.

Now, if I do the Roth IRA conversion (backdoor Roth IRA), after tax amount gets considered only little aprx. $500 and rest $5500, I have to pay taxes next year when I receive 1099-R form.

 

That means, even though I am converting ONLY NonDeductible amount, due to aggregation rule, it considers all my IRA amount and only considers $500 as tax free amount.

 

So, I do not see much benefit in doing conversion.

 

That being said, now, I am thinking more to keep the NonDeductible amount in the IRA account AS-IS... But, will there be any tax penalties or any issues in the future? 

 

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Exactly.  As I pointed out above the "Backdoor Roth" only works of the Traditional IRA value is zero at the start and zero at the end.

You can NEVER withdraw ONLY the nondeductible part - it must be prorated over the entire value of ALL Traditional IRA accounts which include SEP and SIMPLE IRA's. (For tax purposes you only have ONE Traditional IRA which can be split between as many different accounts as you want, but for tax purposes they are all added together).

For example using rough figures: if you had $60K of nondeductible contributions in an IRA with a total value of $600K (10:1 ratio), then when you take a $60K distribution from any IRA account $6,000 would be nontaxable and $54,000 would be taxable (same 10:1 ratio) , with the remaining $54K of basis staying in the IRA for future distributions. As long as there is any money in the IRA, there will be some basis.

TurboTax will ask for your non-deductible "basis" and then the *Total Value* of *all* Traditional IRA, SEP and SIMPLE accounts as of Dec 31, of the tax year. That is so the prorating of the basis can be properly proportioned between the current years distribution and the remaining IRA value. That is done on the 8606 form.