In tax year 2015, I made a $5,500 contribution to my traditional IRA account. By the end of the year, I had earned more than I had anticipated and was over the income cap limit for the contribution to be deductible. I did file Form 8606 that year, so it is on record with the IRS. I had also made a contribution the prior year (2014) that was deductible, so the account has both deductible and nondeductible contributions. My question is this: Should I leave as is, keep good records, and figure out the taxable/nontaxable basis when I start taking distributions, or roll it all into my Roth account and pay tax on the deductible contribution and all gains now? Also, can I still roll it over in 2018 when the only two contributions were made in 2014 and 2015?
The decision on whether to roll a traditional IRA to a Roth IRA involves many factors. The basis (nondeductible portion), the appreciation (market value over basis), years to retirement, how aggressively the IRA is invested, your tax bracket today, and anticipated tax bracket at retirement all should be considered before a Roth rollover. I advise you to seek a CPA and provide all the relevant facts so that you get the proper decision for you.
You can roll a traditional IRA into a Roth IRA anytime, regardless of when nondeductible contributions were made. Just understand that, depending on your basis in the traditional IRA, this rollover could be taxable.
When you start taking traditional IRA distributions, or roll to a Roth IRA, you should calculate the taxable part of the distribution or Roth rollover using Form 8606. Even if you do not make another nondeductible IRA contribution, you should put Form 8606 in your tax returns until all the basis, nondeductible contributions, are used on distributions or rollovers to a Roth.
For more resources, check out PICPA’s Money & Life Tips, Ask a CPA, or CPA Locator.
Answered by: Paul K. Rudoy, CPA, PFS, is managing partner of H2R CPA in Pittsburgh, Pa.