Q: I have an IRA and I am currently contributing to my 403(b). Since I make a tad too much to contribute to a Roth IRA, I would like to open a non-deductible IRA and then convert it to a Roth. I am confused about the tax liability. I have heard that there is a formula for deriving my taxes on any gains that includes all retirement accounts rather than just any earnings on the new IRA from the time I open it to the day I convert. Is this true? If so, what is this formula.
A: As requested, here is the formula to calculate the Tax-Free amount of a Roth conversion:
Tax-free Percentage = Total Non-deductible Contributions divided by (Sum of year-end value of all IRA accounts + Conversion Amount
$100,000/($200,000 + $100,000) = $100,000/$300,000
Tax-Free amount of Conversion = 33.3% (or $33,333)
Please be advised you do not include the balance of your 403(b) plan in the calculation. Only the IRA accounts.