Retirement Planning/Roth


What is required to convert and transfer my IRA funded with after tax money to my Roth IRA?
Thank you

The Financial QB
The Financial QB  
K, thanks for your question. This is a rather simple process but often confusing since the tax consequence is tricky. First anyone can convert their Traditional IRA into a Roth IRA during the tax year and it does not have to be an "all or nothing" proposition. Meaning you can make a conversion of a percentage of your Traditional IRA over time, or one time, or convert 100% at one time. The amount you convert is up to you. However, be prepared to pay the tax on the conversion for the tax year in which the conversion was made.

Here is the tricky part and this is where I would consult with your accountant and financial advisor. What tax will you owe on the conversion of a Traditional IRA which was made with after-tax money? Meaning one cannot specify which dollars of the Traditional IRA to convert to a Roth.

The tax calculation is easy if you've made only tax-deductible contributions. In that case, you'll have to pay taxes on the entire balance when you convert a traditional IRA to a Roth IRA. But the money can grow tax-free after that. If you've made both tax-deductible and nondeductible contributions to your traditional IRAs, then your tax bill will be based on the ratio of nondeductible contributions to the total balance in all of your traditional IRAs. If your total balance is $100,000, for example, of which $20,000 represents nondeductible contributions, then 20% of any conversion would be tax-free.

Please make sure to consult your account and your financial advisor before taking the time to do a conversion since you do not want a tax surprise the following year.  

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Richard E. Reyes, CFP


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