Earnings on non-deductible contributions in Traditional IRA

[NJ_Devils]

I have non-deductible contributions in my Traditional IRA (yes, not the smartest thing. Should have just put it into a ROTH IRA).

It's been several years and I can't make any amendments now, but I want to convert the whole thing to a ROTH IRA. How should I go about treating the earnings on my non-deductible contributions? Are they taxable or not?

[Critter-3]

Step 1 ... tell the IRA custodian you want to CONVERT your IRA to a ROTH

Step 2 ... wait for the 1099-R to come next January

Step 3 ... enter the 1099-R  and complete ALL the following questions in that section to indicate how much was non deductible reported on the form 8606 in the year of the non deductible contribution.  Using that info the program will automatically put the earnings on the return as taxable.  

[Hal_Al]

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.