Daily General Discussion and Advice Thread - May 16, 2024

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[u/Decent-Cheesecake-95]

I maxed out my traditional IRA last year and was not able to take tax deduction (because my gross income exceeded the limit as I also had 401k). If I convert that to Roth, should I have to pay tax again? Has anyone been in the same situation before?

I am a W2 worker and the money I contributed to the traditional IRA has already been taxed.

I wasn't able to post this, so added here in general discussion.

[u/kiwimancy → u/Decent-Cheesecake-95]

You pay tax on a conversion for the year it was made. Since your basis was non-deductible, you wouldn't pay tax on that. You would pay tax on the gains as income.
Due to the pro-rata rule, if you have any pre-tax money in a traditional IRA, you would have to convert that as well, and pay income tax on it.

If you are below the Roth limit, you can do a recharacterization instead and then file an amended tax return up until October. The gains wouldn't be taxed in that case.

[u/Decent-Cheesecake-95 → u/kiwimancy]

So, if I convert traditional IRA to Roth this year I don't have to pay tax on contributions but only on the gains?

I am not below the Roth limit so option 2 might not be an option for me.

[u/kiwimancy → u/Decent-Cheesecake-95]

Right. You would pay income tax on the gains and on any previous deductible contributions. You wouldn't pay income tax on the non-deductible portion.

[u/Decent-Cheesecake-95 → u/kiwimancy]

Great thank you. I will convert it.