I have a unique situation.
I started a traditional IRA 5 years ago and decided to convert to a Roth. I correctly re characterized the 2024 and 2023 with in the IRS window. I also sent in the form 8606 for every year.
I’m far from retirement and never took and withdraws. I NEVER took any deduction for the traditional IRA. I suspect I’m going to have some tax liability but confused on what that looks like. Will I be taxed on unrealized gains(ie the total balance at the conversion date) or only on gains that were realized over the 3 year (or 5year) span of the traditional IRA?
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I'm slightly confused by your explanation of the timeline, but the general rule is that:
If you convert a traditional IRA to a Roth IRA, and you have a non-deductible basis in the traditional IRA, that part of the conversion is not taxed, but any other growth is taxed (since it was previously growing tax-free).
For example, if you contributed the maximum in 2020, 2021 and 2022, your non-deductible basis in the traditional IRA is $18,000. This should be shown on your most recent form 8606. If the value of the IRA is $30,000 on the day you convert it to a Roth IRA (and you convert it all), $12,000 will be taxable income.
The taxable amount will be calculated on Form 8606 of the year in which you did the conversion, incorporating in the calculation whatever basis in nondeductible traditional IRA contributions you have, including any that resulted from recharacterizations of contributions from Roth to traditional.
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