Converting To A Roth IRA From A Traditional IRA That Includes Non Deductible Contributions

[Romper]

I plan on converting a small portion of my Traditional IRA to a Roth IRA after taking my RMD for 2024.

The Traditional IRA includes non deductible contributions amounting to only about 1.5% of the total IRA value prior to converting.

I plan on converting only about 3% of the Traditional IRA to my Roth IRA.

While hardly worth bothering with, is there a need to prorate the conversion and how would I report that in TurboTax?

Thanks in advance

[Opus 17]

If you don't pro-rate the conversion, you will pay tax again on the non-deductible contributions, and you will break the chain of paper trail that documents the non-deductible contributions, so you won't be able to claim a pro-rated non-taxable conversion in the future even if you wanted to.   If it's a small amount, it's up to you if you want to pay the tax twice so save the hassle.

You need your form 8606 from your most recent tax return that has the form. Form 8606 is created when you make non-deductible contributions or conversions, but you don't get a new form in a year when you don't do those things.  So if your last non-deductible contribution was many years ago, you need to go back to that return to get the form.   Form 8606 is a form you should keep copies of your whole life, or until the IRA is closed.  It is an exception to the rule that tax papers can be discarded after 3 or 6 years.

Turbotax will ask the necessary questions, and create a new form 8606 using items from the old form 8606 and the current year conversion information, that calculates the non-taxable portion of the conversion and the non-deductible basis remaining in the traditional IRA. 

[dmertz · Accepted solution]

Roth conversions are unconditionally required to be reported on Form 8606 Part II.  When you have basis in nondeductible traditional IRA contributions, Part I is also required to be completed where the pro rata calculation is done.  As Opus 17 said, a pro rata portion of your basis in nondeductible traditional IRA contributions applies to the distribution whether you file a correct Form 8606 or not, so there is no reason not to prepare Form 8606 correctly so that the nontaxable portion is not taxed.  TurboTax will ask the necessary questions to obtain the information needed to complete Form 8606.

[Romper]

Thankyou Champ and Dmertz

[Romper]

Thankyou Champ

[crouse-house]

I'm just discovering backdoor Roth conversions.  So, I'm facing many years (~20 yrs +/-) of non-deductible IRA contributions (~$50,000 cost basis) that I'd like to convert to my Roth IRA and leave the earnings behind in the Trad. IRA.  Can this be done in one fell swoop?  Am I inviting an audit?  Would TurboTax have all my old Form 8606's in my account history that I can retrieve?  I've been using TT to do my taxes all that time, but only thought I needed to save my last 5-6 returns.  Thanks! 

[Opus 17]

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@crouse-house wrote:

I'm just discovering backdoor Roth conversions.  So, I'm facing many years (~20 yrs +/-) of non-deductible IRA contributions (~$50,000 cost basis) that I'd like to convert to my Roth IRA and leave the earnings behind in the Trad. IRA.  Can this be done in one fell swoop?  Am I inviting an audit?  Would TurboTax have all my old Form 8606's in my account history that I can retrieve?  I've been using TT to do my taxes all that time, but only thought I needed to save my last 5-6 returns.  Thanks! 

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No.  You can't move just the non-deductible contributions, you have to use the pro-rata rule.

For example, if the IRA value is $200,000 and your non-deductible basis is $50,000, then ANY conversion will include 25% of the non-deductible basis and 75% of the pre-tax funds, so the conversion will be 75% taxable.  If you convert $50,000, you would pay tax on $37,500, you would move over $12,500 of your non-deductible basis, and the other $37,500 on non-deductible basis remains behind in the traditional IRA for the next time you withdraw or convert.

A "backdoor" Roth only works as intended if you have no deductible funds in any traditional IRA.  You would have to convert the entire traditional IRA at some point (all at once or in steps) and pay tax on it, then you could move forward with the backdoor Roth contributions as it is meant to work.