non deductible traditional IRA contribution to Roth

Forum|Forum|2 years ago
April 12, 2024
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Hello,

I have made 2023 non dudectible traditional IRA contribution and then moved to the Roth IRA.i understand that I am going to get 1099R. Do I have to pay taxes since this was non deductible contribution ?

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Best answer by Opus 17

Hello, Thanks for the good insight of how to manage traditional and Roth and how it taxed.

Just one question to came in mind if I can do traditional rollover any other type of retirement plan rather than converting to Roth that could offer by the any brokerage firms?

@bhJogdt wrote:

Hello, Thanks for the good insight of how to manage traditional and Roth and how it taxed.

Just one question to came in mind if I can do traditional rollover any other type of retirement plan rather than converting to Roth that could offer by the any brokerage firms?

This chart shows what kinds of rollovers are allowed, depending on the source.

https://www.irs.gov/pub/irs-tege/rollover_chart.pdf

https://www.irs.gov/retirement-plans/plan-participant-employee/rollovers-of-retirement-plan-and-ira-distributions

However, when you have a mixture of deductible and non-deductible money in your traditional IRAs, you have a bit more to be careful about what kind of rollovers you do. For example, if you want to rollover your IRA into a 401k at a new employer, you can't choose to just rollover the deductible portion.

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Employee

Did you have funds in your IRA account(s) before you made the 2023 contribution?

@bhJogdt

bhJogdtAuthor

yes I have fund from previous years deductible IRA and this year I am not eligible for deductible IRA so I made a contribution in April 2023 and bought equities.I moved equities to Roth IRA around 6488.(2023 limit).Is it going to be an issue ?

Opus 17

Employee

@bhJogdt wrote:

yes I have fund from previous years deductible IRA and this year I am not eligible for deductible IRA so I made a contribution in April 2023 and bought equities.I moved equities to Roth IRA around 6488.(2023 limit).Is it going to be an issue ?

You will owe some tax. When you do this kind of rollover, it is pro-rated. You can't only rollover the non-deductible portion. For example, suppose your previous balance of traditional IRA funds was $20,000. You contributed $6500 of non-deductible funds, meaning that 24.5% of your balance was non-deductible. When you did the $6500 conversion to a Roth IRA, 24.5% of the conversion is non-taxable ($1592) and the other 75.5% ($4908) is a taxable conversion of the deductible balance. Then, since you rolled over $1592 of non-deductible funds, your remaining IRA balance after the rollover still contains $4908 of non-deductible funds. Turbotax will generate a form 8606 to track your non-deductible IRA balance, and you must keep a copy of this form for the rest of your life (or until 3 years after you have no more traditional IRAs.) You will use your 2023 form 8606 to prepare your 2024 return or whenever you either make more non-deductible contributions, or conversions, or withdrawals, from a traditional IRA.