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Tax-free Roth IRA conversion

Print | Comments () Posted by Andrew Chan June 27, 2012 09:30 AM

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I have an IRA that was funded with only after-tax contributions. I did not receive a tax deduction for any of those contributions. Can I convert my IRA to a Roth IRA without incurring any taxes on the conversion?

The conversion would be free of any income taxes if the value of your account is less than the amount of non-deductible contributions that you made into the account. When you make a nondeductible contribution to an IRA, those contributions become part of your “basis”. In order for your conversion to be tax-free, your basis needs to be higher than the value of your account. If the value of your account exceeds your basis, the conversion will likely result in a tax on the amount above your basis because that amount would represent taxable earnings.

For example, let’s say that the total of the non-deductible contributions in your IRA is $10,000 (i.e., your basis) and the current value of the IRA is $12,000. The difference between the current value and the basis of your IRA is $2,000. This $2,000 represents earnings, which would be taxable if you were to convert the IRA to a Roth IRA. On the other hand, if the current value of the IRA is $9,000, your $10,000 basis would exceed the value of your account by $1,000. This difference would not be taxable because you lost money in your IRA.

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About the contributors

Andrew Chan is the founder of Integrative Financial Advisors in Framingham. He provides comprehensive financial planning advice and investment management services. He has been an adviser for over 12 years and works with clients to integrate all aspects of their finances including investments, retirement, education funding, and tax planning.

Cheryl Costa is a principal at Forteris Wealth Management which is an independent, fee-only firm with offices in Framingham and Purchase, NY. She advises clients on investing, education funding, taxes and retirement planning. She has a BS from Worcester Polytechnic Institute and an MBA from Boston University and she is a Certified Financial Planner.

Jamie Downey has been an accountant for more than 14 years. He's a partner at Downey & Co. in Braintree. Prior to joining the firm, he served as a manager in the audit department of accounting firm KPMG.