non deductable IRA conversion to Roth

[mitgr5200@yahoo]

What is the name of your state (only U.S. law)? Michigan
In 1993 I put $2000 into a traditional non-seductable IRA. (I did file form 8606 with my taxes that year) It has gotten mixed in with all my otherTraditional IRA money. I want to convert it to Roth, but I understand that I can not just put the Basis ($2000) into the roth without considering the gain also. Since it was mixed with everything else, how would I proceed, not having any idea what the gain was on just that $2000.

 

[tranquility]

If you're converting all your IRA's, I don't see the problem. Everything will be income but the basis of the non-traditional IRA.

 

[mitgr5200@yahoo]

I only an converting that $2000, it is the only non deductable I have

 

[tranquility]

You don't decide where to remove it from. You remove it proportionally. [See Code Section 408(d)(2)]
You must determine the FMV value of the account. There is no law to cover your problem. You FMV must not be a "ballpark guestimate" but something you may have to defend.

1. Non-deductible IRA worth $3,000 with a basis of $2,000
2. Traditional IRA worth $10,000


Calculation:
FMV of non-deductable divided by the Total value of all IRAs times the FMV of the non-traditional for percentage basis. Subtract that from amount withdrawn for the taxable amount. Using my numbers in 1 and 2 above on a withdrawal of $2,000:

($3,000/$13,000)*$2,000= $462
$2,000-$462=$1,538 is amount withdrawn to be taxed on in the conversion.

Info edit:
That being said, I believe there was a very recent change in the law regarding conversions. Although I have glanced at it, I have not studied it yet. The above is as of a month or so ago. I'm not sure if the change will affect you.

Superduper edit:
Based on anteater's post, I changed the wording above and bolded it. The formula was correct, I just didn't use the words correctly. The OP needs the FMV of the non-deductible IRA. I repreat the phrase he is having trouble with as I cannot solve his problem on getting the FMV. He cannot just guess at it. Cases use the term "ballpark guestimate" for an illegal method. However he determines the FMV, he may have to defend the calculation to the IRS. There isn't a rule beyond the fact that people are supposed to be responsible for their own accounting. The OP didn't do it properly (or his broker's didn't) and now it is up to him or his tax preparer to come up with a figure. The IRS may come up with theirs. The difference is handled as such differences are.

 

[mitgr5200@yahoo]

many thanks

you have taken quite a bit of time to explain the answer to me. I will see if I can go back to my figures with the information. I really want to thank you for taking the time with this answer, not many do.

Tim

 

[mitgr5200@yahoo]

non deductable IRA was dumped into traditional IRA immediately

one more thing about my situation. Apparently, I originally put it in with my Traradional IRA. So, I have no way of knowing what that particular $2000 would make over the basis. I just had traditional IORA's at that time, that I added to regularly. Everything mixed in toghether. Then later on, I got some Roth IRA's going. Then I have rolled over $01(k)s into the tradional IRA's too. I can't possibly figure out what only that $2000 wouldbe worth on it's own Do I have to shoot myself?

Thanks.

 

[tranquility]

You FMV must not be a "ballpark guestimate" but something you may have to defend.

 

[mitgr5200@yahoo]

"You FMV must not be a "ballpark guestimate" but something you may have to defend."

was this your respose to my latest post,Tranquility? I don't want to sound ungrateful, but it didn't really give me anything. If you are tired of the same questions that keep coming up, I am sorry, and I appreciate your help, it is just that I just can't see how I can use anything BUT the $2000 as a basis because things got so mixed up.

Thank You for all the help,
Tim

 

[anteater]

I think that you and Tranq are talking past each other now. At the risk of being blindsided by the change that Tranquility mentioned:

Once you talk about converting to a Roth, the gain on a particular traditional IRA contribution (whether deductible or not) is not relevant. You have three relevant values:

1) The value of all your traditional IRA's as of 12/31 in the year of conversion.
2) Your basis in all of your traditional IRA's - in your case $2,000,
3) And the amount that you are converting. (Don't think of this as coming from some particular "IRA mental bucket." All that matters is that it is coming from a traditional IRA.)

From there, just slot the numbers into Tranquility's formula or work it through on Form 8606. You end up with some portion of the conversion amount being taxable (or non-taxable, depending on how you view it), and, unless you are converting your traditional IRA's entirely, some basis left in the traitional IRA's.

 

[mitgr5200@yahoo]

you guys have been a tremendous help! Thank You!!

 

[efflandt]

If you make any non-deductible contributions to a traditional IRA you need to track that forever, or at least since your last previous Form 8606. The already taxed basis gets pro-rated as a portion of "each" distribution (or conversion) regardless of which traditional IRA account or broker you moved it to (unless an isolated totally untaxed rollover rolled/transferred back into a 401k).

That is different from a Roth IRA where distributions come from already taxed contributions first with no penalty or further tax on that portion ever (unless you undo or recharacterize a contribution for current tax year and have to account for any gain/loss of that specific contribution like it had never happened).

I bought a home and moved in 2002 and started doing gradual IRA to Roth IRA conversions in 2005 (~$10k/yr to stay under next higher tax bracket), but had no clue what year I had made a non-deductible IRA contribution. I found tax forms from the 80's, but not the one needed from 1991 until the end of 2006, so I could do 1040X before getting back on track with 8606 for 2006 tax. I convert with a phone call (Fidelity) and specifically tell them no withholding (covered by W-4 adjustment).