April - non-deductible contribution to traditional IRA July - converted to Roth August - rolled my 401k into traditional IRA Should I pay tax on the conversion?

[schanchk]

At the time I did the conversion all the $ in the traditional IRA were post-tax.  Since the conversion, I have rolled over pre-tax 401k $ into the traditional IRA.  It seems like I shouldn't have to pay on the conversion since it was all post-tax $, but Turbotax is taxing showing a tax on ~$4700 of the $5500 converted.  It seems to be based on the year end value of the traditional IRA which was all put in after the conversion.

[schanchk]

How do I fix this in TurboTax?  Or am I required to pay taxes even though at time of conversion it was all post-tax$?

[dmertz · Accepted solution]

You have made a mistake with your retirement accounts that many people make.  Unfortunately, the rollover of the 401(k) to a traditional IRA has caused your Roth conversion to be largely taxable because the taxable amount of your Roth conversion depends on the year-end balance in your traditional IRAs, not your balance in traditional IRAs immediately after the conversion.

Likely only a small amount of your basis in nondeductible traditional IRA contributions will be applied to your Roth conversion.  The rest of your basis will apply bit by bit to each future distribution from your traditional IRAs until you have a zero balance in traditional IRAs at year-end.

[DanO]

The conversion of Traditional IRA to Roth IRA in August will result in taxes owed on the pre-tax dollars that were converted. If there is any money in the Traditional IRA that was after-tax dollars then you may not owe taxes on that portion.

The 401k to Traditional IRA will not be impacted by any taxes, until you receive distributions.