Tax on Roth Conversion from non-deduct 1997 IRA

[Guest bbrian]

I converted a $2000 non-deductible Traditional IRA (opened in 98 for tax year 97) to a Roth (converted in 1999). In theory I should only have to pay tax on the earnings-$83 (I converted $2083) when I report the conversion for tax year 1999. When I attempt to complete Form 8606, and try to interpret the instructions, it appears that I will wind up paying tax on at least $2000 because I have other traditional IRAs that are reported on line 6 of Part 1. I wasn't able to determine how to complete the form in accordance with the IRS instructions so that I would wind up with a taxable amount on line 16 of $83. Is there a catch? I opened this IRA in the first place because numerous IRA articles talked about how you would only have to pay tax on the earnings of non-deductible traditional IRAs when you converted to a Roth. Now it seems I have been fooled? Is there an example/interpretation of this?

[BPickerCPA]

If you have other traditional IRA accounts your basis of $2K is apportioned over all the IRA balances. You CANNOT pick one account and say that this account represents the non deductible fund. So the 8606 is correct.

[Guest greymann]

bbrian, unfortunately those Roth IRA articles that you read are incorrect. Even though you may have numerous IRA accounts (nondeductible and deductible), for tax purposes you are treated as having one IRA, so when you converted your nondeductible IRA, you are treated as taking a distribution of a proportionate amount from all your IRAs. For example, assume you have 2 IRAs, each valued at $2,500, but one has a basis of $2,000. If you convert the one with the basis you are treating as converting 1/2 of your IRA, and your additional income as a result of the conversion will be $1,500. ($5,000 IRA minus $2,000 basis times 1/2).

if you are unsatisfied with the result you can "unconvert" (recharacterized) your Roth IRA back to a traditional IRA by your tax filing due date (plus extensions).