Conversion: IRA to Roth

[Guest BigAl]

I would greatly appreciate it if someone could explain why all existing IRAs are considered in the tax formula, when a conversion of one IRA, which contains only after-tax contributions, is converted to a ROTH. And, also what exactly is pro-rata? I just doesn't seem correct that existing IRAs should enter into the tax formula on form 8606. Maybe I am wrong.

[Appleby]

BigAl, As far as ‘why’, it is simply because that is how congress said it must be.

Pro-rata means proportionately. For example, if 40 percent of your assets are after-tax assets, then 40 percent of your distribution/conversion will be subject to income taxes.

For the formula see, IRS Form 8606 and its instructions @ the following websites-

http://www.irs.gov/pub/irs-pdf/i8606.pdf

http://www.irs.gov/pub/irs-pdf/f8606.pdf

See also a response to a similar question that you posed at this website .

http://benefitslink.com/boards/index.php?showtopic=14630

[John G]

The methodology is set by law and IRS regs. The Federal perspective is indifferent to how many IRAs you own and where they are located. Conversion math is based upon the aggregate data: the total sum of all IRAs and the amount that was after tax contributions. I would imagine that the primary reason for this is to eliminate "cherry picking" and other game playing.

Pro rata essentially means all data treated proportionally.

You can not selectively pick and choose parts of an IRA or which IRA that you want to convert. All conversions are done on the valuation of the day of conversion. If 20% of your IRAs would not be taxable, then no matter how much you convert only 20% of the converted amount is non-taxable. You can not just convert the non-taxable components. Sorry.

[Guest BigAl]

Thank you both, Appleby and John G, for your explanations. Even though it is not what I was hoping to hear. IRS sure makes things difficult! Thanks again.

[Guest BigAl]

Since your last reply to my question, my company's 401K spokesperson has stated that they would send a check upon my request,for only the after-tax portion of my 401K to my broker and retain the pre-tax in the present account. It would seem that I should be able to then convert that new IRA, which contains only after-tax money, to a ROTH, with no tax liability, if I have no other existing IRAs. Then, next year, rollover the remaining portion of my 401K, which is pre-tax dollars. Is that still not allowed by the IRS? And, is the law vague enough to be open to interpretation. Thanks in advance, fellas.