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I contributed $5,500 to a traditional IRA during tax year 2014. My accountant did not take the traditional IRA deduction, apparently I was not eligible for it. My new accountant is telling me to convert that 2014 contribution into a ROTH-IRA, but my custodian is telling me that I will have to pay income on that conversion. However, I did not take any benefit on the initial deduction during 2014. Can someone provide any insight on my options?

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    Is this $5,500 the only money in that traditional IRA, or is it intermingled with other funds that were deducted? – Joe Mar 10 '16 at 16:25
  • I believe is intermingled since I just used the same custodian I normally use. @Joe – Geo Mar 10 '16 at 16:52
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    It doesn't matter if it is the same custodian or not. "Intermingled" means you have deductible contributions and non-deductible contributions. Whether they are at the same custodian or not doesn't matter. – littleadv Mar 10 '16 at 18:01
  • @user102008 Good point - since the IRS considers all IRAs to be one IRA. – Joe Mar 10 '16 at 18:03
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Money in an IRA that has both deductible and non-deductible contributions in it is called mixed basis. Any withdrawal - including a conversion - must be taken proportionally from each category (after the tax year it's contributed, anyway).

So if you have $55,000 in your IRA, of which $5,500 was contributed non-deductible and $49,500 was contributed as deductible or earnings since, you would then need to pay tax on 90% of any Roth conversion - regardless of how much you're converting.

Search terms for this topic are "Isolating IRA Basis", such as this article.

The form you'd fill out is Form 8606; it includes instructions for filling this out.

In your case, you likely would have $5500 on line 5, unless you made other nondeductible contributions to your IRA.

  • Thanks so much Joe. This is exactly what I was looking for, I just could not find it. – Geo Mar 10 '16 at 20:22
  • Form 8606 only talks about nondeductible contributions for 2015, it does not talk about contributions to 2014. Is it the same form for 2014? – Geo Mar 11 '16 at 3:01
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    Form 8606 would have been filed in 2014 hopefully. It also would be filed if you wanted to convert some of that IRA to Roth. – Joe Mar 11 '16 at 3:02
  • Thanks Joe! My previous accountant did not even catch the fact that the Traditional IRA was nondeductible. So no form was filed in 2014. It sounds I don't have any options. I wish there was a phone line to contact someone at the IRS. – Geo Mar 11 '16 at 12:34
  • Either he should've deducted it or known it was nondeductible, that's confusing that he'd do neither. In either event you can always file a 1040X to amend the 2014 return - talk to your current CPA. – Joe Mar 11 '16 at 15:09
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You custodian is telling you that you may have to pay income tax on that conversion.

You need to attach form 8606 to your tax return to calculate that. If you have other balance in your IRA that you did get deduction for, you may need to prorate.

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