From: Minneapolis, MN
Dear TaxMama,
I converted a traditional IRA to a Roth last year. This IRA was funded with
about 30% non-deductible after-tax funds.
In filling out Form 8606 it appears I am being taxed again on these after-tax
funds. Form 8606 does not have me establish my basis in the IRA fund I am converting
and then subtract that basis from my total conversion to determine the amount
I should be taxed on.
[TaxMama translation: It doesn't let him show how much of his IRA money was
already taxed.]
Instead I add up my total traditional IRAs plus my conversion amount
and then divide that figure into my total non-deductible contributions. Then
I multiple this figure by the conversion amount to determine the amount that
won’t be taxed. This doesn’t seem right.
Will you explain why this is done this way?
Brian
Dear Brian
I honestly haven't a clue.
Nor do I want to.
I have done everything in my power to convince everyone around me to NEVER
pay taxes in advance unneccessarily. So far, I've always been proven
right in the ROTH conversion arena... except once.
That guy was inheriting in a bundle and his income upon retirement was going
to be really high, even before he drew money from his IRA. It made sense to
convert the account earlier, when his income was lower.
[And then his mother died sooner. And he took all the monies he inherited
and put them into his house. Which he sold at a nice, non-taxable profit
and did that again...and will continue to earn money tax-free. So, as it turns
out, he won't have a high income when he retires. So, I was right - he prepaid
the ROTH conversion for nothing.]
So, I can't help you. Because I've shied away from all those computations.
If your income is so high that you want to pay taxes in advance, you can
darn well afford to pay someone to do the silly computations for you.
Besides, if they get them wrong, you're covered because you did the responsible
thing and got a professional to do it for you.
(Besides that, I doubt if anyone at IRS knows how to do the darn fool computation
either.)
Have fun!
Eva Rosenberg, MBA, EA
