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My wife is planning to roll over her entire Traditional IRA to a Roth IRA using the backdoor form 8606.

We are trying to determine if we need to pay taxes on just the deductible contributions made or these deductible contributions PLUS earnings in the Traditional IRA (the entire amount)?

  • Thanks for all of the answers. This is really helpful. :-) One more question - is the value (for tax purposes since all of this is taxable for us) the snapshot of the account on the date it is rolled over to a roth or the value of the account on Dec 31 in that same year? – David Mar 13 '17 at 4:10
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You will owe tax on all but the deposit that was not taxed.

e.g. You deposited $5000/yr for 3 years, and deducted $5K for each of 2 years (the third $5K deposit was a nondeductible IRA contribution which you reported to the IRS by filing Form 8606 with your tax return for that year). Now you convert the total balance of $18K ($15K of contributions plus $3K of interest/gains). In this case, $5K is not taxable income while the $13K is taxable income. This calculation is done on Form 8606 for the year of the rollover.

Edit in response to OP's comment. The Roth conversion is text based on the value of a day it was converted. One thing to be aware of is that you can re-characterize up until the time you file your taxes for 2017 in April 2018 (or with extension up until October). This offers you the opportunity to undo the conversion if for whatever reason the value is lower at the time you do your taxes or if the converted amount will put you into a higher tax bracket. You don't need to give the IRS a reason, it's up to your discretion.

As Dave note in a comment, the conversion isn't all or none. The recharacterization, along with this fact, help you to fine tune exactly how much in converted in hindsight.

  • I expanded your explanation a little because I found it to be a little cryptic and not easy to understand, Please roll back if you don't like the changes. – Dilip Sarwate Mar 11 '17 at 19:52
  • Well, now I just feel bad that I am the author, when you wrote nearly all of this. Thanks for the help. – JTP - Apologise to Monica Mar 12 '17 at 17:37
  • Thanks for the help with this. I really appreciate it! Say we roll over on Monday (tomorrow - 3/12) -- is the rolled over amount (for tax purposes) the snapshot at the time it was rolled over or do we have to wait until the value at the end of 2017? (Does this question make sense? We are basically getting a very good return, so if it's at the time of the rollover, it would make sense to do it right now rather than wait any more time while the value goes up...) – David Mar 12 '17 at 19:33
  • Below min edit: /all but/s/not taxed/not deducted/; /response/s/text/taxed/; s/value of a day/value on the day/ @David: Monday is 3/13, at least in the Eastern time zone :-) Also note you/she don't have to do the whole amount; you can convert only part of your trad money to Roth if you want. (Of course if you want to do all, do all.) – dave_thompson_085 Mar 12 '17 at 21:17
  • @dave_thompson_085, Thanks. You're right - tomorrow is the 13th. – David Mar 13 '17 at 2:40
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You will owe tax on all deductible contributions, and on any gains from those.
You will not owe taxes on any non-deductible contribution, but on any gains from those.

Non-deductible contributions are called 'basis', and this is tracked on form 8606. As you didn't get a tax break when you contributed them (that's why they are called non-deductable), you don't pay tax now; they came from already taxed money. Everything else is money that was so far tax-free, so you have to pay taxes on it when you roll it to a Roth.

Note that if the filing of form 8606 was neglected in the past (needed for non-deductible contributions only), you hurt yourself, as you will effectively pay tax again on that money. You can file adjustements to your taxes for the last three years to correct this, though.

  • It might be worth mentioning that if Form 8606 was not filed for the year of the non-deductible contribution declaring that a nondeductible contribution has been made and thus the IRA has a basis, then the IRS position is that the contribution was tax-deductible, and thus taxable income when a distribution is taken. Yes, it is possible to rectify this situation in most cases but it is a lot of hassle and additional paperwork. – Dilip Sarwate Mar 12 '17 at 16:45

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