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Can a client convert non-deductible traditional IRA contributions into a Roth IRA without tax consequences if they also have a pre-tax SEP IRA account? Are there any tax consequences?


The BIDaWIZ Team's Answer:

Yes, there are tax implications as the pro-rata rule applies as referenced in IRS Notice 2014-54. For IRA distribution/conversion purposes, all IRAs are considered one big giant IRA. It does not matter if you have one IRA that was rolled over from a former employer and one after-tax IRA where you put contributions for which you do not take a deduction. All IRAs will be considered one IRA any time you take a distribution or complete a conversion. Since they are all one IRA, you cannot convert only the after-tax funds in your IRA. All distributions or conversions will be treated pro-rata. The Form 8606 should be completed to calculate the pro-rata impact. The form takes the total year-end balance of all your IRAs and divides that into the total balance of all after-tax amounts in all IRAs. The resulting percentage is then applied to the distribution to determine the tax-free portion of the distribution. The remaining balance of the distribution is taxable. The tax-free amount of the distribution will reduce the total after-tax amount carried forward to your next Form 8606.

References: IRS Notice 2014-54; IRS Publication 590
State: Maine

The BIDaWIZ Team



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