Example # 1 – Full Conversion
Harold has two IRA accounts. One is a contributory IRA and the other is a SIMPLE IRA and the total value of both is $22,000. Since inception, Harold has contributed $9,000 as non-deductible contributions. He now decides to convert both IRAs to ROTH accounts. Because all his accounts are being closed, the $9,000 non-deductible amount is considered to be basis and is distributed tax free.
Example # 2 – Partial Conversion
John has three IRA accounts including a contributory IRA to which he has contributed $14,000 after tax, a SIMPLE IRA, and a rollover IRA. The contributory IRA balance is $29,000; the SIMPLE IRA balance is $23,000, and the rollover account balance is $60,000. Only the contributory IRA and the SIMPLE IRA are being converted to ROTH accounts. All three accounts must be taken into consideration in determining the taxable portion of the distribution:
$14,000 / ($29,000 + $23,000 + $60,000) = 0.1250
$52,000 x 0.1250 = $ 6,500 tax free distribution
$ 45,500 taxable distribution
Remaining basis in the rollover IRA $ 7,500
Example # 3 – Allocation of Basis
Rachel owns a traditional IRA with a value of $125,000 with a basis of $25,000. She takes a distribution of $125,000, converts $100,000 to a Roth IRA and keeps $25,000. Her basis of $25,000 cannot be attributed to the portion of the account that she keeps. The basis is allocated as followed:
$100,000 Conversions $ 20,000 Basis recovered
$25,000 Kept $ 5,000 Basis recovered
Example # 4 – ROTH Conversion from after-tax 401(k)
Jane has $100,000 in a Traditional 401(k), $25,000 in non-deductible contributions, $10,000 in gains attributable to the after tax contributions, $45,000 in deductible contributions and $20,000 in gains attributable to the deductible contributions. Jane leaves her employer and decides to roll over her old 401(k) into both a traditional IRA and a ROTH IRA account. The non-deductible contributions are rolled into a ROTH IRA. The basis for the non-deductible contributions is $10,000. The taxable distribution for the rollover is $10,000. The amount of the total conversion less basis equals the taxable gain. This is equal to the taxable distribution. The full $65,000 from the deductible contributions and gain rolled into a traditional IRA is a non-taxable roll-over.
PlanRock offers financial planning tools, investment portfolios, various levels of advice, and full-service support. Please contact 800-677-6025 or go to www.PlanRock.com for more information about how we can help you reach your goals.
© PlanRock Wealth Management, LLC. The content above is available for use only by authorized subscribers, clients and where permissible as such. This content is not authorized for resale. Past performance does not guarantee future results. The sources we use are believed to be reliable, but their accuracy is not guaranteed.