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Level 3

Roth IRA conversion

I have before tax and after tax contributions in separate IRA's that are more than 5 years old. I want to convert part of the before tax IRA to a Roth IRA. I am 60 years old.

1. Does the pro-rata rule apply in this instance?

2. Does the 5 year rule apply to the funds converted to the Roth IRA?

3. Any other considerations?

1 Best answer

Accepted Solutions
Level 20

Roth IRA conversion

  1. Yes.  When determining the taxable and nontaxable amounts of a Roth conversion, your IRAs are treated in aggregate.  The age of your traditional IRAs is not relevant.  The fact that you made your nondeductible traditional IRA contributions to any particular IRA is irrelevant.  The pro-rata calculation is done on Form 8606 using the total of your nondeductible traditional IRA contributions previously reported on your most recently filed Form 8606 (and any current-year nondeductible contributions, if any), the amounts of your conversions and other traditional IRA distributions and the total of the year-end balances in your traditional IRAs, if any amounts remain. 
  2. Since you are over age 60, any distribution you receive is free of any early-distribution penalty.  The 5-year rule for conversions does not apply since it is only used to determine if the conversion amount is subject to an early-distribution penalty when distributed from the Roth IRA before age 59½.  However, there is a different 5-year rule that is used to determine if earnings that occur in your Roth IRAs are tax free, qualified distributions when distributed.  This 5-year rule is satisfied 5 years after the beginning of the year for which you first make a Roth IRA contribution.  If your first Roth IRA is established by a Roth conversion in 2018, distributions occurring after 2022 will be qualified distributions, entirely tax free no matter how much is distributed from your Roth IRAs.  Until then your tax-free distributions are limited to the converted amounts plus any regular Roth IRA contributions you might have made.  Under the ordering rules for Roth IRA distributions, earnings are distributed last.
  3. To maximize the benefit of a Roth conversion, pay the taxes on the conversion with other, after-tax funds, rather than using a retirement-account distribution to pay the taxes.  By paying the taxes with other funds you maximize the amount that you get into Roth IRAs to be able to grow tax free (once your Roth IRAs are qualified).  In doing this, decline tax withholding on the Roth conversion and, if necessary to avoid a tax underpayment penalty, make an estimated tax payment.  If you have taxes withheld from the traditional IRA distribution that is being converted to Roth you'll have to come up with funds from another source to complete an indirect Roth conversion of the portion withheld for taxes.
6 Replies
Level 20

Roth IRA conversion

  1. Yes.  When determining the taxable and nontaxable amounts of a Roth conversion, your IRAs are treated in aggregate.  The age of your traditional IRAs is not relevant.  The fact that you made your nondeductible traditional IRA contributions to any particular IRA is irrelevant.  The pro-rata calculation is done on Form 8606 using the total of your nondeductible traditional IRA contributions previously reported on your most recently filed Form 8606 (and any current-year nondeductible contributions, if any), the amounts of your conversions and other traditional IRA distributions and the total of the year-end balances in your traditional IRAs, if any amounts remain. 
  2. Since you are over age 60, any distribution you receive is free of any early-distribution penalty.  The 5-year rule for conversions does not apply since it is only used to determine if the conversion amount is subject to an early-distribution penalty when distributed from the Roth IRA before age 59½.  However, there is a different 5-year rule that is used to determine if earnings that occur in your Roth IRAs are tax free, qualified distributions when distributed.  This 5-year rule is satisfied 5 years after the beginning of the year for which you first make a Roth IRA contribution.  If your first Roth IRA is established by a Roth conversion in 2018, distributions occurring after 2022 will be qualified distributions, entirely tax free no matter how much is distributed from your Roth IRAs.  Until then your tax-free distributions are limited to the converted amounts plus any regular Roth IRA contributions you might have made.  Under the ordering rules for Roth IRA distributions, earnings are distributed last.
  3. To maximize the benefit of a Roth conversion, pay the taxes on the conversion with other, after-tax funds, rather than using a retirement-account distribution to pay the taxes.  By paying the taxes with other funds you maximize the amount that you get into Roth IRAs to be able to grow tax free (once your Roth IRAs are qualified).  In doing this, decline tax withholding on the Roth conversion and, if necessary to avoid a tax underpayment penalty, make an estimated tax payment.  If you have taxes withheld from the traditional IRA distribution that is being converted to Roth you'll have to come up with funds from another source to complete an indirect Roth conversion of the portion withheld for taxes.
Level 3

Roth IRA conversion

Thank you for your reply. I neglected to say that I will be transferring the funds to a Roth IRA that was established more that 10 years ago. What effect does that have on the 5 year rule you mentioned? 3. Any other considerations for the conversion?
Level 20

Roth IRA conversion

Since you are over age 59½ and it has been more than 5 years (the 5-year rule for qualification) since the beginning of the year for which you first contributed to a Roth IRA, *any* distributions you receive from your Roth IRAs will be qualified distributions, tax and penalty free, including those deriving from Roth conversions no matter when the Roth conversion took place.  As I mentioned in #2 above, the 5-year rule for conversions (a different rule from the 5-year rule for qualification) does *not* apply since you are over age 59½.  (I've edited that statement above to make it clearer.)
Level 5

Roth IRA conversion

Using form 8606 I had contributed to non-deductible IRA  prior to availability of ROTH IRA. I would like to convert to ROTH IRA. Since I have another traditional IRA( this account deductible amount), if I convert this deductible traditional IRA to ROTH IRA  during this year 4th quarter, do I still need to do pro-rata calculation on non-deductible IRA if I convert this non-deductible  to ROTH in 4th quarter as well ? Was thinking since I converted my only taxable IRA to ROTH IRA, no need to pro-rata and pay no tax this year for this non-deductible amount.

Thanks
Level 20

Roth IRA conversion


@Intchk wrote:

Using form 8606 I had contributed to non-deductible IRA  prior to availability of ROTH IRA. I would like to convert to ROTH IRA. Since I have another traditional IRA( this account deductible amount), if I convert this deductible traditional IRA to ROTH IRA  during this year 4th quarter, do I still need to do pro-rata calculation on non-deductible IRA if I convert this non-deductible  to ROTH in 4th quarter as well ? Was thinking since I converted my only taxable IRA to ROTH IRA, no need to pro-rata and pay no tax this year for this non-deductible amount.

Thanks

@Intchk-

The answer to your question is no - the basis is always prorated over the aggregate value of all existing Traditional, SEP and SIMPLE IRA accounts.

 

There is no such things as a "taxable" or "non-taxable" IRA - your IRA consists of the aggregate value of all IRA accounts.

 

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.

Highlighted
Level 5

Roth IRA conversion

Thank you for reply and information!

Appreciated!

Regards