If I have a 401k and a traditional IRA, am I at risk of paying double taxes if I convert to a Roth IRA?

Question

I started with a traditional IRA that I contributed the maximum amount to for a few years. Then I get a 401k and started contributing to that. I also continued to contribute to my IRA, but it was no longer tax deductible.

If I end up converting my traditional IRA to a Roth IRA, how would the taxes work for the years where my IRA was not tax deductible? Would I end up being double taxed on that?

Answer 1

You won't end up being double taxed. The money in your Traditional IRA can be grouped into three categories:

1. Deductible contributions
2. Non-deductible contributions
3. Earnings

If you convert the entire balance of your Traditional IRA to Roth, you'll pay regular income tax on the value of #1 and #3, but not #2. Unfortunately you can't choose to only convert #2 to Roth; there is something called the pro rata rule that says whenever you do a conversion, it must come proportionally from the pre-tax and after-tax components. See Form 8606 for more details.

A few side notes:

• Are part of your non-deductible contributions from 2017 and/or 2018? If so, and your income is below the limits, you can do what's called a recharacterization to Roth. You would contact your brokerage to do this, and it'd be like you contributed to a Roth in the first place (a proportional amount of the account's earnings would be moved along with the contribution). This would be advantageous because a Roth IRA is almost always superior to non-deductible Traditional IRA.
• Are you sure you want to do a Roth conversion? As mentioned above, you'll pay regular income tax on all but the after-tax amounts. That's basically undoing the benefit of the pre-tax deduction you received. If it's a substantial amount of money, you could push part of it into a higher income tax bracket. If you really want to convert, you might consider if it makes sense to stretch it over several years to lessen the tax impact.