Back Door Roth Conversion

[tiberius72]

Hi,

Firstly, thanks for this excellent blog. Hats off to you for doing this.

So I have an IRA that I have been contributing for the last few years. Because income level was too high I was not getting any tax breaks for contributing, but still continued as a way to invest and have the chance to be taxed deferred.  It turns out I took no action with these funds, it just sat there as I thought how to do this conversion stuff. Last year it earned a total of $75. As I didn't do much of anything with these funds when I do my conversion will probably just be paying tax on the $75 that was earned. Or will I pay taxes on the total amount I try to convert ?

Is it best to convert in one sweep or over the years?

Thanks in advance

Tiberius

[gocurrycracker]

Assuming ALL of the contributions are after-tax, then you would pay no tax on converting those funds. (Only on gains.)

If you have other IRAs that are pre-tax, then the amount you convert is pro-rated -> a percentage of the conversion would be considered part of the pre-tax funds, which would result in taxes due. This can be avoided by rolling all of your pre-tax IRAs into your 401k.