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Our household MAGI (Modified Adjusted Gross Income) does not allow us to contribute the full amount to a Roth IRA for 2010. In that case is converting some part of Traditional IRA to Roth to complete the gap, a good idea? Do the income restrictions only apply to direct contributions and not to conversions for the Roth IRA?

I know that we cannot claim any tax deductions for the contribution to a traditional IRA (due to MAGI limits), and that is okay with me. But, since I have already been adding post tax dollars to the traditional IRA, will I be taxed again if I convert it to a Roth IRA?

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1 Answer 1

up vote 5 down vote accepted

You have tracked the non-deducted IRA money via form 8606. Now, you have two numbers. Total balance and taxed deposits. For example - I deposited $5K/yr into my IRA for the last 4 years, not deducted from my income. I now have a $20K post tax amount, but my actual balance can be higher (I'd hope) or lower. If my balance is lower, a full conversion has no tax due at all. If my balance is, say, $25,000, conversions are 20% taxable, i.e. a full conversion has $5K of the conversion subject to taxes, $20K not. A $10K conversion (ready?) has $2K taxed, and my running "post-tax" balance is now $12K, as $8K was just converted.

When answering questions, I struggle to balance brevity with a comprehensive answer, forgive me if I missed the mark prior to editing here.

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please excuse me but could you elaborate your answer more? I could not understand what exactly you meant by having "two numbers, total balance & taxed deposits"?Thanks! –  EndlessSpace Mar 9 '11 at 13:56
    
No problem - I made a major edit, pls confirm you read it and it now makes sense. –  JoeTaxpayer Mar 9 '11 at 18:01
    
+1. To the OP: there is no limit on how much you can convert from a traditional IRA to a Roth IRA. –  Phil Sandler Mar 10 '11 at 17:42
    
thanks for the great explanation. So, in my case, if I add $5k (max amt) to traditional IRA and convert it right away to Roth (in few days), then I won't need to pay any taxes unless the traditional IRA gained some value in those few days. –  EndlessSpace Mar 11 '11 at 1:42
    
You're most of the way there. So long as there's no pretax money or growth in all IRAs combined, you are right. For sake of this issue, you have one (Traditional) IRA, regardless of the number of accounts comprising them. Do you have any pretax IRA deposits or only the post tax money gone in? –  JoeTaxpayer Mar 11 '11 at 3:14

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