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Merlo
Merlo, Accountant
Category: Tax
Satisfied Customers: 9783
Experience:  25+ years tax consulting. Specializing in returns for US citizens living abroad
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I have been contruting to my my IRA on an after tax basis for

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I have been contruting to my my IRA on an after tax basis for a number of years. Can I transfer the principal amount contributed to the IRA (not the interest or cap gains) into a Roth IRA without any tax implications. For example if I had contributed 2K to a plain IRA on an after tax basis and the acount is now worth 2.5K can I transfer 2K to a roth IRA without any tax implications and leave .5K in the plain IRA account. I would think that i can becasue i have already paid taxes on the intial contribution to the plain IRA

Hello JA Customer,

 

You can convert part of your after tax IRA to a Roth without any tax implications, but you cannot pick and choose which of the conversion amounts apply to your after tax contributions and which apply to earnings. The withdrawals or conversions that you make from a tax paid IRA are treated as partially applying to your contributions and partially applying to the earnings on the account.

 

Just to give you a simplified example -- if you made $4,500 in tax paid contributions to an IRA and the account has earnings of $500, the total account is now worth $5,000. Ten percent of the total is attributed to earnings, so when you make a withdrawal, 10% of the withdrawal is taxable. In other words, if you only withdrew the $4,500 which is the amount you originally contributed, you would still be taxed on 10% of that amount (or $450) and the other $4,050 would not be taxable. Then once you withdrew the remaining $500, you would pay taxes on $50 (10% attributable to earnings) and not pay tax on the remaining $450.

 

You actually need to fill out IRS Form 8606 to calculate the percentage of your withdrawals that would be subject to tax.

 

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Thank you

 

 

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