Questions and Answers
An individual has a traditional IRA that's been funded with both deductible and nondeductible contributions. He wants to establish a new nondeductible traditional IRA, make contributions through 2010, and convert it to a Roth IRA. If he converts only the new nondeductible IRA, will he have to pay tax only on the earnings in the new one, or will he have to consider the deductible contributions and earnings in the old traditional IRA?
Each year an individual makes nondeductible traditional IRA contributions, he must complete and attach IRS Form 8606, Nondeductible IRAs, to his/her federal income tax return. Form 8606 records these nondeductible contributions and tracks the total nondeductible balance in all of an individual’s traditional IRAs. This aggregate nondeductible balance or “basis” is one of the factors in the calculation of the nontaxable portion of any subsequent distributions, including conversions. So, it is not possible to remove the nondeductible contributions without removing a proportionate share of deductible contributions and earnings as well. An IRA owner should seek professional tax advice to determine the taxable amount of an IRA distribution.
(Posted: 07/02/2008)
