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