In fact, some high income earners regularly fund
nondeductible IRAs and then convert them to a Roth, a strategy known as the «backdoor Roth IRA.»
Not exact matches
If you own several traditional
IRAs, you must aggregate (add together) all their balances and
nondeductible contributions to determine the taxable distribution.
These accounts work much like Roth
IRAs, allowing you to make
nondeductible contributions, build up investment earnings inside the account, and eventually withdraw the money, including earnings, without paying any tax if the money is used for college expenses.
If you convert only part of your traditional IRA, or if you have more than one traditional IRA and don't convert all of them, then the nontaxable part of your conversion distribution will be determined by a formula where the nontaxable percentage is the amount of your total
nondeductible contributions (less any nontaxable distributions you previously received) divided by the total balance of all of your traditional
IRAs.
A: Yes, but when you determine how much of your conversion distribution is taxable, you're required to treat all your traditional
IRAs as if they were one big IRA, so you don't get any advantage if you take the distribution out of the IRA that has the most
nondeductible contributions.
If you've made
nondeductible contributions to one or more regular
IRAs, then the conversion will be at least partly nontaxable.
A: If you convert the entire amount of all traditional
IRAs you own, then the non-taxable part of your rollover distribution is simply the total amount of
nondeductible contributions you made to all of those
IRAs, less the amount of nontaxable distributions you received in the past.
Q: How do I determine how much of my distribution is nontaxable if I made
nondeductible contributions to one or more of my traditional
IRAs?
Some people have traditional
IRAs that consist mostly of
nondeductible contributions.
If you also made
nondeductible contributions to your
IRAs, some of the amount won't be subject to income taxes.
Once you make a
nondeductible contribution or roll over after - tax amounts to any of your Traditional, SEP or SIMPLE IRA, any subsequent distributions from any of your Traditional, SEP or SIMPLE
IRAs will include a prorated amount of pretax and post-tax assets, as these
IRAs are aggregated for the purposes of determining the taxable amount of any distributions.
Basis, also referred to as after - tax balances, accrue in retirement accounts from
nondeductible contributions and rollovers of after - tax amounts to
IRAs.
Note that withdrawals from deductible and
nondeductible traditional
IRAs are subject to ordinary income taxes and if withdrawn prior to age 59 1/2 may be subject to an additional 10 percent federal income tax penalty (for
nondeductible traditional
IRAs, only the portion of the withdrawal attributable to earnings is taxable).