A Non-Deductible IRA Is Worth It For Me

In Alternatives to a High Cost 401k Or 403b Plan , I mentioned non-deductible IRA as one of the options. If you are not eligible to contribute to a Roth IRA, you can still contribute to a Traditional IRA. Even though the contributions are not tax deductible, the money in the IRA still grows tax deferred.

For some people this option beats investing in a taxable account. If you are eligible for a Roth IRA, of course contributing to a Roth IRA is better than contributing to a non-deductible IRA but not all people are eligible for a Roth IRA. Instead of listing the pros and cons of a non-deductible IRA qualitatively, I created this spreadsheet which lets you calculate the bottom line and compare it against investing in a regular taxable account:

Non-Deductible IRA Or Taxable

After you enter your assumptions, the spreadsheet will calculate how much you will have in a non-deductible IRA and how much you will have in a taxable account, after all taxes are paid. Of course the calculated result will depend on your assumptions. So play with some what-ifs. For example under this set of assumptions,

Marginal Tax Rate at withdrawal 28%
Capital Gains Tax Rate at withdrawal 20%
Tax Rate on Distributions 28%
Investment Return 8%
Distributions in Taxable Account 2%
Number of Years Until Withdrawal 30

a non-deductible IRA beats a taxable account after all taxes even for a tax efficient fund which only distributes dividends. In the above scenario I assumed the laws will stay as we know now. In other words, capital gains will be taxed at 20% and dividends will be taxed as ordinary income, because under the current laws the special 15% rate for long term capital gains and qualified dividends will go away in 2013. If the fund isn’t so tax efficient and its distributions are 2.5% instead of 2.0%, a non-deductible IRA’s advantage goes up.

A common argument against the non-deductible IRA is that it converts capital gains into ordinary income. While true, as the actual calculation demonstrates, if the investor has a long timeframe, the benefits from tax deferral can overcome the higher tax rate on withdrawal.

Another thing that comes up whenever a non-deductible IRA is mentioned is tax form 8606. If you make a non-deductible IRA contribution, you have to file this form. It’s a very simple form. Mine has only 3 numbers on it. In the ages of computers, tax software does the calculation and produces the form. Filing Form 8606 for the contributions is really a non-issue.

The non-deductible IRA is already better than a taxable account for me (use the spreadsheet with your own assumptions and see if it’s better for you). The possibility of converting it to Roth makes it even better. Under the current laws, a traditional IRA can be converted to a Roth IRA in 2010 and every year thereafter without any income limitation. The spreadsheet calculation does NOT include the effect of such conversion. If there are no changes to the laws and a traditional IRA is allowed to be converted to Roth with no income limit, a non-deductible IRA’s advantage over a taxable account will be much larger.

I have IRAs with both pre-tax and after-tax money. My current plans for taking advantage of the Roth conversion are:

  • In 2008, establish a Self-Employed 401(k) Plan (aka “solo 401k”). All I need is a little bit of self employment income, which I already have. Otherwise performing some paid services for neighbors should count. Fidelity offers a no-fee solo 401k .
  • In 2009, roll over from my Traditional IRAs to my solo 401k everything except non-deductible contributions. This is crucial because otherwise the pre-tax money in the Traditional IRA will also be taxed during the Roth conversion. The solo 401k provides a safe haven for the pre-tax money.
  • In 2010 and every year thereafter, make a new non-deductible contribution to Traditional IRA. Convert the entire Traditional IRA to Roth.

Even if the Roth conversion option goes away, a non-deductible IRA is still not bad by itself. It’s well worth the effort for me.

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  1. Marc Hedlund says

    Hey, TFB,

    I have an IRA-related question on which you might have an opinion. My wife and I are expecting our first child soon, and I already am planning a 529 account for education savings. However, I was thinking about the standard pitch personal finance advisers give about investing in IRAs early (“it’s better to invest $10,000 when you’re 20 and never invest again than to start investing $1,000 a year when you’re 35” or whatever the numbers are), and it occurred to me that starting an IRA for our child — specifically, a Roth IRA — would make sense as early as the child’s first year of life. Do you know if that’s allowed, and if so, what do you think of the idea?

    If Roth contributions were taxed at current tax rates, and could grow for a full 65 years before being withdrawn without further taxation, the benefit of that seems substantial. I also always think of retirement accounts as essentially a once-a-year opportunity to invest, which expires at the end of the year and cannot be re-obtained after that (in other words, once the 2008 tax year is over, you never again have access to 2008’s maximum contribution — you can go on to 2009’s contribution but 2008 is gone forever). From that view, not investing in retirement for the first 20 years of a child’s life is essentially letting 20 opportunities lapse.

    Any thoughts on this?

  2. Anonymous says

    Excluding the Roth conversion option, while the numbers may work out *slightly* in favor of the non-deductible IRA over a taxable account, the edge will be very slight.

    In exchange for that slight edge, you add complication to your life and tie up money in an IRA account.

    When you die, your heirs get to try to figure out how much of your contributions were deductible versus non-deductible. They won’t be able to figure it out, and will pay more tax on your estate than they need to.

    Further, it’s quite likely that tax rates will increase in the future (gotta pay for the national debt somehow). So in my opinion, any analysis which assumes static tax rates is automatically suspect.

    I’ve considered the non-deductible route, and in my opinion even ignoring the latter two reasons, keeping things simple with a taxable account was by far the better choice.

  3. Harry Sit says

    Marc – In order to contribute to any IRA, Roth included, the person must have earned income up to the contribution amount. That means your child has to earn something. If you employ your child in your own business, you must be able to reasonably claim that the child worked in the business to earn his or her wages. Both the employer and the employee portion of the Social Security and Medicare taxes must also be paid. It’s probably not feasible for a one-year-old but not inconceivable for a 6-year-old. As soon as your child has some earnings, I think it’s a great idea to contribute 100% of that income until you hit the annual contribution limit. Like you said, you only get that opportunity once a year. You can’t make up for it.

    Anon – The purpose of this post is to present a tool for comparing a non-deductible IRA with a taxable account. You can make your own assumptions and decide whether it’s worth it. The “complication to your life” to me involves a once-a-year contribution and a simple tax form. Chances are that I will use up all my IRA money before my heirs see anything. I think it’s worth it for me. It’s also reasonable if you conclude it isn’t. That’s why you need a tool to compare the bottom line.

  4. Marc Hedlund says

    TFB: Thanks much for the response and the pointer. Both are great. I didn’t know that IRA contributions had to be based on earned income — I was thinking that gifts from us to our child might be enough.

    It sounds to me like the best structure might be to set up a “matching program” for IRA contributions once our child is legitimately earning income. For instance, say, we will match your income in the form of IRA contributions up to the maximum amount you can contribute in a year. That way, the contributions are strictly limited to what our child is earning, but effectively allow them to contribute their income to an IRA and to have those contributions matched in “allowance” payments.

    Thanks again.

  5. James says

    TFB, I am interested in your comment about washing neighbor’s car for $5. Suppose that someone made $20 (for the year) washing car, does that mean that they can contribute 15% of that $20 to a solo 401K? Is that worth the trouble since they have to file a self-employed income on the income tax?

  6. Harry Sit says

    James – Establishing a solo 401k is primarily for providing a safe haven for the pre-tax money in the traditional IRA. They don’t have to contribute $3 to the solo 401k because that’s not the point. Just rolling over money from existing traditional IRA is good enough. Having earned $20 in self-employment income qualifies them for setting up a solo 401k. Otherwise they can’t do it. Suppose they have 90% pre-tax money and 10% after-tax money in their traditional IRA. If they don’t move their pre-tax money to a solo 401k or a workplace 401k, when they convert to Roth, they will pay income tax on 90% of the converted amount. If they protect the pre-tax money in a 401k, they will basically convert only the after-tax money in the IRA with very little tax due.

    If we are talking about only $20 of self-employment income, there is only one extra tax form (Schedule C-EZ). There won’t be any self-employment income tax because the income is under $400. The form is very simple because it’s got EZ in its name. The tax software will do it in a minute.

  7. Bharat says


    A fellow boglehead!

    Great article. I have been contributing to “non-deductible” IRA with the expectations to move them into Roth IRA. But based on your argument about potential increase in dividend/cap gain taxes it seems that even without the Roth IRA option, “non-deductible” IRA make sense for me.

    I have one question about rollover IRA.

    If i move my money from 401K to Vanguard, will they create a separate account for rollover IRA or move the 401K amount into my existing “non-deductible” IRA? If there is no separate account for rollover amount then i guess, the only option is to open account with another fund company like Fidelity to keep all 401K rollover separate from “non-deductible”.

  8. Harry Sit says

    Bharat – When you rollover your 401k, you can ask for a new account or roll into your existing account. It’s OK to mix non-deductible money with rollover money, but some prefer to keep them separate. Whether you mix them or keep them in separate IRAs, the implication for Roth conversion is the same. That’s why I’m planning to move my pre-tax money to a solo 401k before I do Roth conversion. If you also want to do Roth conversion for your non-deductible money, perhaps you should consider postponing your 401k rollover or roll them into a 401k instead of an IRA.

  9. Bharat says


    Thanks for clarification on option to keep rollover IRA in a separate account.

    I am planning to keep the current 401K & if the new 401K offers better options than rollover into it. So that way, i will only have after tax contribution into the “non-deductible” IRA.

  10. Jason says

    Great article and thought process. I appreciate the tool giving me the ability to decide for myself what works best for me. I am going to be above the earnings restriction for Roth IRA contribution and am trying to find a way to take advantage of the tax benefits. My question is twofold:
    1. Is there a cap to the amount I can contribute to a non-deductible IRA in preparation for the Roth rollover in 2010? I have $100K that I have earmarked for this move.
    2. What would be the latest, in your opinion, that the conversion loophole could be closed and the move no longer be allowed?

    My thought is to hold off until April, move $100K into a non-deductible IRA, then immediately convert to a Roth, but I am concerned that the law will change after April.

  11. Jason says

    Sorry, threefold and this one is alittle bit off point but i hope you can help.

    3. My employer offers a deferred salary program and is a fortune 100 company. This appears to be a slam dunk as it allows me to defer salary to avoid the taxes and also allows me to drive my AGI below the threshold needed for all other tax benefits. Does a deferred salary program allow you to completely hide from the tax burden or will I fall into an alternative minimum tax situation?

  12. Harry Sit says

    Jason – (1) The cap is $5,000 per person per year ($6,000 if you are 50 or older). You also must have earned income of at least that amount. If you do 2009 and 2010 together in early 2010, that’s $10k per person ($12k if you are over 50). Double that for a married couple.

    (2) 2010 looks to be safe now. The earliest conversion will happen in Jan. 2010. As far as I know there’s no pending legislation to change the law. If they are not doing it now, I imagine they are not going to do it before Jan. 2010. Changing the law mid-year after some people already did it probably won’t fly either. Beyond 2010, who knows?

    (3) A nonqualified deferred compensation program defers the taxes until you are paid from it in the future. It’s as if you didn’t earn the money until then. There is no AMT while you are deferring.

  13. Terry Tan says

    This is a great article just because not too many people talking about this Roth conversion strategy (roller over the pre-tax money in the traditional IRA into a solo 401K) to avoid paying income tax at the time of the conversion.

    Is there any reason to do this in 2009? Won’t it be better to do this in 2010, right after you put in the 2010 after tax contribution of 5,000? Can I roll over my pre-tax contribution in Traditional IRA to my company’s 403B? Doesn’t this create the same effect? Thanks!


  14. Harry Sit says

    Terry – I didn’t follow Form 8606 that closely. Maybe you have until December 31, 2010 to rollover your pre-tax money. I just thought if you do it in 2009, it’s super-clean. There’s no ambiguity in how the conversion should be taxed. Rolling over to a company 401k or 403b would have the same effect.

  15. Rehan says

    During my 2009 return if I show that I invested in IRA but my intention was to get the maximum refund first and upon getting that refund amount, I like to invest that declared amount before April 15.

    Is it okay?

  16. Terri Tan says

    I just rolled over my pre-tax asset in my traditional IRA to my company 403B yesterday, thanks to your strategy. I left a couple hundred of dollars more than my basis in my traditional IRA. My account balance this morning indicated that I did leave sufficient (more than my basis) in my traditional IRA. Now, the market tanked today, so I’m sure tomorrow I will have the account balance of less than my basis. Does this mean If I convert my traditional IRA tomorrow to Roth (provided the market does not rally and my account balance is less than my basis), I will NOT have to pay any tax? I’m doing a in-kind conversion. Is this perfectly legit? Any IRS laws require that I have to wait between my rollover of pre-tax traditional IRA and my conversion from non-tax-deductible traditional IRA to Roth? Thanks!

  17. Harry Sit says

    Terri – I’m not a tax advisor but it looks perfectly legit to me. I’m not aware of any waiting period requirement.

  18. Terri Tan says

    Thanks, TFB! BTW, the strategy you taught all of us (rolling over pre-tax asset into a 401K then converting all after-tax asset in traditional to Roth with minimal tax liability) is a truly good one. I even called the IRS hotline to confirm that we are allowed to roll over any pre-tax asset to a qualified plan, as long as you leave at least all your basis (after-tax contribution) behind.



  19. Christy says

    Thanks, this is very helpful as I’ve been wrestling with the Roth conversion issue for several weeks.

    I have a traditional IRA of about $27K, which consists of about $3K in earnings and the remainder contributions (92% nondeductible, 8% deductible). This would be a no-brainer to convert to a Roth, because I’ve already paid taxes on most of it.

    However, I also have a rollover IRA of about $40K (pretax contributions and earnings from an old 401k account). If this has to be counted with the traditional IRA, I estimate the taxable basis is more like 60%.

    It sounds like from what you are saying that I could roll the Rollover IRA back into a 401(k) and then do the conversion on the remaining IRA funds, most of which are after-tax. Am I missing anything?

  20. B says

    Hi there,

    Is there a minimum time limit between non-deductible IRA contributions and rolling over to a Roth? I converted ~8K in a pre-tax IRA to a Roth in Jan 2010, but haven’t made any contributions yet this year, and was planning on contributing 5K after-tax to an IRA and then immediately rolling it into my Roth, and repeating each year from now on.. am I missing something? Is it OK to do 2 Roth conversions in the same calendar year? It seems too good to be true.


  21. Kevin says

    I’ve been ineligible for Roths in the past, but would like to take advantage of them now that a window is open for me to do so. From what I’ve read here, elsewhere, and from what I can make of the tax regs, it seems as though I will owe nothing in taxes if I’m converting 100% nondeductible IRA contributions to a Roth. Is that true? My nondeductible IRAs also currently are worth less than their cost basis, which would seem to guarantee the avoidance of any tax on the conversion. Thanks!

  22. Harry Sit says

    Kevin – No or minimal tax on conversion only if you don’t have other traditional IRAs including SEP, SIMPLE, and IRAs created when you rolled over money from employer plans. If you have other IRAs and you still would like to contribute and immediately convert with no or minimal tax, you have to move those IRAs into an employer plan or a self-employed 401k plan. See comment #22 above.

  23. Kevin says

    OK. To ensure I’m clear, both in communicating my situation and understanding your answer:

    I have a traditional IRA, the result of rolling my 401k from a former employer’s plan to a self directed IRA. I also have a 401k from another former employer that I’ve kept in their plan as well as a 401k with my current employer. In addition, I have 4 separate IRAs (2 in my name, 2 in my spouse’s) that I funded 100% with nondeductible contributions. These are the IRAs I wish to convert to Roths. I intend to leave the self directed IRA as is. It was funded entirely with deductible contributions (when it was in the 401k).

    In order to convert with little to no taxes, I will need to move the 4 IRAs into my current employer’s 401k before converting them to Roths and the reason for that is I have a 5th IRA? If I convert the 4 directly from IRA to Roth, I would pay tax as though all the funds were deductible? Thanks for your perspective!

  24. Harry Sit says

    Kevin – You only move those other IRAs with pre-tax money into a 401k plan. Then you are left with only IRAs funded with non-deductible contributions, which you convert to Roth. If you convert but leave your 5th IRA as-is, you are taxed pro-rata, as though part of the conversion comes from pre-tax money and part from non-deductible contributions.

  25. Kevin says

    Thanks for the clarification!! From posts above, it seems I might be in good shape as my 5th IRA is with Fidelity (others are with Vanguard).

  26. Hament says

    hi ,
    I had already contributed to my 401K about 9K (does not include my employer contribution) for 2009. Am I still eligible to contribute extra 5K to Traditional IRA and take tax benefits for year of 2009 ?


  27. Harry Sit says

    Hament – Yes, you can contribute. Whether the contributions are tax deductible depends on your income and filing staus. You may be able to contribute to a Roth IRA instead of a traditional IRA. It also depends on your income and filing status.

  28. Pat says

    Glad to find this site. I made a roth conversion for 2009 from another account. Looking at my 8606 I discovered I have been doing the cost basis incorrectly; I was including my roth contributions. So to clear all of this up I had to go back to the two years I actually made nondeductible IRA contributions in 2000 and 2001. I’m trying to figure out what I contributed to the IRA in 2000. The only record I have is the 5498 form. It states that I made a $2000 contribution and there is a $1880 recharacterization listed. So did I have a $2000 plus $1880 contribution or only a $2000. This was all 10 years ago I can’t remember any specifics and I only keep tax records back 7 years. So I’m a bit stuck.

    Part of this account was used for a roth conversion in 2002. There is only about $1500 still in this account.

    Any insight would be appreciated. Thank you.

  29. Terri Tan says

    Hi, TFB,
    I utilized your strategy and did my conversion tax free. Thank you for this. I even called IRS and it was confirmed that what you suggested was perfectly legal. However, I did screw up for my spouce’s conversion. I transfered his pre-tax contribution in the traditional IRA to his company 401(k). The company had me jump through the hoop to do it but I finally did. But after roll over pre-tax to 401k, stupid me did not do roth coversion right away and the market has been up ever since. Now I have a couple of thousand gain. Can I create a solo 401K for him (provided he has some freelance income) and then roll over more pre-tax (gain) in his solo 401K? Is this legit? Is there a limit on how many times you can roll over the pre-tax money? I read the reg but did not see anything specific on that. Thanks!

  30. Harry Sit says

    Terri – I’m not aware of any limit on the number of direct rollovers you can do in a year. Now that you know the hoops and how to jump through them, you can do it again to his employer’s 401k for just the gains. If you’d like to create a solo 401k for the freelance income anyway, you can rollover to it too as long as the provider accepts incoming rollovers from an IRA (Vanguard does not). Either way should work.

  31. Ethan says


    I like your plan and had been thinking about this myself, rolling old 401(k) dollars sitting in a Traditional IRA into my new 403(b), and the the non-deductible contributions (basically the basis) to a Roth. 2 questions:
    right now the TIRA is at a loss compared to contributions – do I roll only the amount to the new 403(b) to leave the non-deductible basis (my thought) or do I roll all of the original pre-tax contributions to the 403(b), leaving my basis less than what was contributed?
    2. Should I role the TIRA to the 403(b) now and wait until 2011 to do the Roth conversion, or is it safe to do both in the same year? I think the ORDER does matter, right, but do I need to stretch over 2 tax years?

    you may want to look at this thread too…..

  32. Harry Sit says

    Ethan – The loss relative to contributions in TIRA doesn’t matter. It’s all pre-tax money with zero basis. You can only rollover pretax money to a 403(b). 100% of your basis has to stay in your TIRA.

  33. Ethan says

    Thank you! If I convert to Roth before rolling won’t that trigger the pro-rata rule about the proportion of pre and post tax dollars?

  34. ethan says

    OK – trying it now! Here are the numbers:
    1. 5000
    2. 11000
    3. 11500
    4. 0
    5. 11500
    6. 30000 (this is the actual value BEFORE I roll out, or do I put 11500 here as well????_
    7. 0
    8. 11500
    9. 41500
    10. .27
    11. 3186
    12. 0
    13. 3186
    14. 8313
    15. 0
    16. 11500
    17. 3186
    18. 8314
    Did I do this right? Basically my basis is 11500, my contributions my employer plan were 20500, but the CURRENT value is 30000. (there is $8 in earnings from a brief re-characterization from roth back to TIRA when income changed). If I change line 6 to 0 (assuming I roll over and convert the same year), and line 7 is truly 0 as rollovers are not included, my line 18 and line 15c are both 0. Which is right?

  35. N.A.T. says

    I was found disabled by a Administrative Law Judge, after considertion of my entire record, along with my treating psychiatrists.
    I needed the little bit of money from my 401K for medical, housing,etc.
    Scottrade refused to code as code 3 – disability distribution – Scottrade overrode the Administrative Law Judge decision. What can I do?

  36. Ben says

    I am so glad to find your site. I have read several your articles and found them very informative. I have contributed my after-tax income to Roth IRA in the past few years (max out my pre-tax income in 401K so that I am eligible to Roth IRA). This is the first year I think I won’t allow to contribute to Roth IRA. And I totally forgot I can still contribute to non-deductible IRA. In my situation, I only have one 401K and one Roth IRA. From what I understand here is I can open a non-deductible IRA account, contribute 5K and immediately roll it into my Roth IRA with no additional tax due. Is it true? If it is, then why government make us go this route instead of just raise limit so we can contribute to Roth IRA directly?

  37. Harry Sit says

    Ben – It is true. The government lets you go this route because you are lucky you don’t have another traditional IRA. For others who have additional traditional IRAs but are not willing or able to jump through another hoop in rolling over the traditional IRAs to a qualified plan, the government will tax the Roth conversions. If the government simply raises or eliminates the income limit for a direct contribution, they won’t be able to collect as much tax.

  38. ethan says

    Hi TFB,

    I wrote previously – see posts 35,36 above. I did this plan with my account and things worked well ( will see at tax time of course).I now want to do the same for my wife, but since then the market has gone up. Regarding how much to roll from the TIRA into the current 403(b) can I do everything except any non-deductible basis? What about interest from the non-ded contributions, and interest from the original 401(k) dollars?

  39. Harry Sit says

    Ethan – Yes you can rollover everything except non-deductible basis, including interest from the non-deductible contributions. However I’m having second thought on the sequence (comments 36, 38, 40). Although it works on Form 8606 if you convert to Roth before you rollover the remainder to a qualified plan, I come back to my original thought that rolling over before converting to Roth is safer and easier to explain in case a question comes up during audit. Leaving a little cushion in the IRA and paying a small amount of tax on the conversion is still a good deal. You don’t have to shoot for absolutely zero tax.

  40. ethan says

    So if I have now made a (small) profit in the TIRA, do I roll everything except the non-ded basis to the 403(b) and the basis to the Roth? What do I do with interest from the non-ded basis and the old 401 – I have no way of knowing how much interest came from each….

  41. Harry Sit says

    @ethan – Yes, leave a small cushion in the IRA to account for market fluctuations. You want to show after the rollover to 403b, you still have at least 100% of your basis in your IRA. How much interest came from which doesn’t matter. They are all pretax money.

  42. Harry Sit says

    @ethan – You have pre-tax money and post-tax money in your IRA. Pre-tax money consists of your original 401k rollover, earnings from it, and earnings from your non-deductible contributions. Post-tax money is just your non-deductible contributions. Rollover the bulk of pre-tax money except a small cushion to a qualified plan. Pre-tax money is pre-tax money – it doesn’t matter where it came from. See comments 45 and 47.

    After the rollover, your IRA will have a small amount of pretax money plus 100% of your post-tax money. Convert the whole thing to Roth. Done.

  43. Ethan says

    Hi again – one last question that may be of interest to others. I will need to complete an IRA Distribution form at the firm holding the TIRA, and then distribute the funds (directly – rollover to qualified plan) to the employer sponsored 403(b). One of the form questions asks the type of distribution – above age 59 1/2, disabled, building first home, etc, but there is no box for what we want to do! If I select the under age 59 1/2 will I trigger the tax in this transfer as they will now be reporting?

  44. Mark says

    This will likely be an easy question, I hope. My situation: married with after-tax non-deductable traditional IRAs for my wife and me (we make more than allowable for Roth contribution eligibility). Contributing for past 4 years with ~20k in each. No cost basis so flipped both into ROTH IRAs in 2010. I have no other IRAs. Just found out my wife has traditional (likely pre-tax and/or deductable) from before marriage (I think in part 401k rollover from past employment). 17k in that IRA. She has not contributed to that IRA in ~10 years. Will there be any tax to be paid for the recent ROTH conversion?

  45. Harry Sit says

    @Mark – Her pretax money in a traditional IRA will trigger the pro-rata rule. It will cause you to pay tax on roughly $9000 on her $20k conversion (17 / 37 * 20). If you don’t mind paying taxes, you might as well convert the other $17k to make it all clean for 2011. If you don’t want to pay any tax at all, recharacterize her $20k conversion, rollover her $17k to a 401k or 403b plan, then convert the $20k non-deductible IRA again. Search for backdoor Roth IRA on this website for more info.

  46. Mark says


    Thanks for the advice. I think in the long run, converting my wifes “long lost” pre-tax trad IRA (and paying the tax on 17k) along with our after-tax non-deductable IRAs (no tax) this year will be to our benefit.

  47. GIRISH S GUPTA says


  48. Jerry says

    I have a dilemma. I have several pre-tax deductible Traditional IRAs. I also chose to open an exclusive after-tax non-deductible IRA. I have never comingled the accounts, thus my non-deductible account is clean and pure. In 2010 I was informed I could convert the non-deductible IRA into a Roth IRA.
    The basis of the after-tax non-deductible IRA, in my view, would be purely the sum total of my annual contributions. At the time I made the decision to convert my non-deductible IRA to a Roth the after-tax IRA valuation was at a deficit to my basis; it was a loss position. It’s my understanding with a non-deductible IRA you should only be taxed on the appreciation in value. Logically any liquidation, full or partial, should then be tax free, because I had already paid taxes on all the contributions to the account.
    I took the 2010 RMD based on the 2009 account value prior to conversion, and then transferred the net pre-tax funds to the new Roth IRA.
    Now, the basis of my dilemma is the IRS Form 8606, as I read the instructions, require that ALL IRAs held be entered onto the Form thus comingling deductible and non-deductible funds, which I have never done, and would result in a prorated taxable event on my after-tax conversion.
    Any advice?

  49. Harry Sit says

    Jerry – Your previous understanding was incorrect. When you comingle the pre-tax and after-tax funds or not, the IRS sees all your IRAs as one combined pot.

    When exactly did you convert the traditional to Roth? In 2010 or 2011? If in 2010, you should’ve discovered this last year when you did your Form 8606. If you converted in 2011 — it sounds like the case because you are looking at Form 8606 now — and you’d like to avoid the prorated taxable event, you still have time to undo the conversion.

    It’s called a recharacterization. Call the IRA provider and tell them you’d like to recharacterize your conversion. They will tell you what form to fill out. If you recharacterize before April 15, it will be as if you never converted in the first place. If you converted in 2010, it’s already too late; there’s nothing you can do about it.

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