I always thought different and I think I read different on this board and some reference material- in that the conversion would have to include some of the after-tax and some of the pre-tax
Part of what she says is
QUOTE
Now here's where things get interesting. Consider rolling your after-tax contributions into a separate traditional IRA. This is a relatively new twist and is only possible because the 2001 Tax Act introduced a provision that allows rollovers of after-tax contributions.
Since your income will clearly be below the $100,000 limit for Roth conversions, once this money hits IRA #2, you can immediately convert it to a Roth IRA. From then on, any gains the account generates will be tax-free. Furthermore, unlike the owner of a traditional IRA, the owner of a Roth IRA never has to take any withdrawals. (With a traditional IRA, you must begin withdrawals the year you reach age 70 1/2.) As I've explained here before, when you convert money in a traditional IRA to a Roth, you have to pay income tax on the amount that has not yet been taxed.
But here's the beauty of the strategy I'm suggesting: By definition, you already paid income tax on your after-tax contributions! (Hang in here with me.) By detaching the earnings from these contributions (and sending these to IRA #1), the only assets in IRA #2 are those which have already been taxed. So the conversion costs you nothing!
You end up with a traditional IRA (IRA #1) containing all of your pre-tax money (both contributions and earnings) and a Roth IRA (IRA #2) with after-tax money that can benefit from tax-free growth for as long as it remains in the Roth.
Since your income will clearly be below the $100,000 limit for Roth conversions, once this money hits IRA #2, you can immediately convert it to a Roth IRA. From then on, any gains the account generates will be tax-free. Furthermore, unlike the owner of a traditional IRA, the owner of a Roth IRA never has to take any withdrawals. (With a traditional IRA, you must begin withdrawals the year you reach age 70 1/2.) As I've explained here before, when you convert money in a traditional IRA to a Roth, you have to pay income tax on the amount that has not yet been taxed.
But here's the beauty of the strategy I'm suggesting: By definition, you already paid income tax on your after-tax contributions! (Hang in here with me.) By detaching the earnings from these contributions (and sending these to IRA #1), the only assets in IRA #2 are those which have already been taxed. So the conversion costs you nothing!
You end up with a traditional IRA (IRA #1) containing all of your pre-tax money (both contributions and earnings) and a Roth IRA (IRA #2) with after-tax money that can benefit from tax-free growth for as long as it remains in the Roth.