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I have a Roth IRA and my wife has a Traditional IRA. We are both covered by retirement plans by our employers. 2018 was the second consecutive year we could not deduct any portion of the Traditional IRA contributions due to being over the income limit. So the last two years our tax return has been tracking our IRA Basis, the total amount we have contributed to our Traditional IRA that is not deductible.
My questions is should we stop contributing to this Traditional IRA account and open a new Roth account? Or just continue to contribute to this account and track the Basis every year? We have no reason to believe we will ever be able to deduct any Traditional IRA contributions in the future. Essentially this Traditional IRA account will just become a Roth IRA account over the next 30 years correct? It will continue to grow with non-deductible contributions and the Basis portion of contributions that can be withdrawn tax free will grow to 95% or more of the total contributions.
Best I can tell, there is not really any harm in continuing to contribute to this account as the money can still be withdrawn tax free just like a Roth.
If you are within the income limits for a Roth, then that would likely be better. When you have an IRA with combined pre and post tax dollars the withdrawal and reporting process is more complicated. The growth of your after tax dollars will be only tax deferred, compared to a Roth where the growth of your contributions will not be taxed. Withdrawal of your contributions from a combined IRA will require you to calculate the amount that is to be taxed based on pre and post tax contributions and growth. The IRS has rules and forms for doing so that, so I suggest that you read them to make sure you want to go that route.
I have a Roth IRA and my wife has a Traditional IRA. We are both covered by retirement plans by our employers. 2018 was the second consecutive year we could not deduct any portion of the Traditional IRA contributions due to being over the income limit. So the last two years our tax return has been tracking our IRA Basis, the total amount we have contributed to our Traditional IRA that is not deductible.
My questions is should we stop contributing to this Traditional IRA account and open a new Roth account? Or just continue to contribute to this account and track the Basis every year? We have no reason to believe we will ever be able to deduct any Traditional IRA contributions in the future. Essentially this Traditional IRA account will just become a Roth IRA account over the next 30 years correct? It will continue to grow with non-deductible contributions and the Basis portion of contributions that can be withdrawn tax free will grow to 95% or more of the total contributions.
Best I can tell, there is not really any harm in continuing to contribute to this account as the money can still be withdrawn tax free just like a Roth.
Well, one difference that jumps out at me is that if you put money into a Roth, none of your later earnings/ distributions from that Roth will be taxed. If you put those funds into a traditional IRA instead, the earnings from your traditional IRA will be taxed upon withdrawal.
Well, one difference that jumps out at me is that if you put money into a Roth, none of your later earnings/ distributions from that Roth will be taxed. If you put those funds into a traditional IRA instead, the earnings from your traditional IRA will be taxed upon withdrawal.
If that is the case we should definitely switch. So the Basis makes the contributions tax free in the traditional IRA but the earnings are still taxed even if they are from the Basis? I'm not 100% sure that is accurate.
When you withdraw money from your traditional IRA as a distribution or by rolling it over into a Roth IRA, you can’t take out only your IRA basis. Instead, the percentage of your IRA balance that is your basis determines the percentage of the withdrawal that counts as basis dollars. For example, if 20 percent of the money in your IRA is considered IRA basis dollars, 20 percent of any withdrawal counts as basis money. This part of the withdrawal is not taxable. You only have to pay income taxes on the part that does not count as IRA basis.
So if after 30 years 95% of the money in the IRA is considered basis dollars than 95% of any withdrawal would be tax free. Wouldn't the withdrawal include both contributions and earnings?
What is our best option? Just roll it all over now into a Roth? We don't really want to keep two separate accounts.
you are confused ... a traditional ira typically has you deducting the contribution up front and paying no taxes yet unless for some reason you are making non deductible contributions , which i doubt . all money is taxed instead when you draw it out .... every penny is taxed .,
the roth has you paying the taxes up front and nothing gets taxed later
If that is the case we should definitely switch. So the Basis makes the contributions tax free in the traditional IRA but the earnings are still taxed even if they are from the Basis? I'm not 100% sure that is accurate.
So if after 30 years 95% of the money in the IRA is considered basis dollars than 95% of any withdrawal would be tax free. Wouldn't the withdrawal include both contributions and earnings?
What is our best option? Just roll it all over now into a Roth? We don't really want to keep two separate accounts.
Are you anticipating your ira to be made up 95% non deductible contributions? What about growth?
If that is the case we should definitely switch. So the Basis makes the contributions tax free in the traditional IRA but the earnings are still taxed even if they are from the Basis? I'm not 100% sure that is accurate.
So if after 30 years 95% of the money in the IRA is considered basis dollars than 95% of any withdrawal would be tax free. Wouldn't the withdrawal include both contributions and earnings?
What is our best option? Just roll it all over now into a Roth? We don't really want to keep two separate accounts.
The earnings are taxed when you make withdrawals. You will calculate a ratio based on pre-tax and post-tax contributions (and change your basis of each). I used to do the paperwork for my dad, who had an IRA consisting of both pre and post tax contributions. I think it was form 8606. I think you can withdraw your post-tax contributions any time with no tax consequences. If you do, all future withdrawals of the earnings will be taxable.
That's why a Roth is better for someone in your situation, any earnings are not taxed.
Are you anticipating your ira to be made up 95% non deductible contributions? What about growth?
I see what you are you are saying. My 95% figure was with regards to just contributions and not the total balance of the account. But just going off of that website I quoted I would think the growth from the nondeductable IRA basis would be tax free.
you are confused ... a traditional ira typically has you deducting the contribution up front and paying no taxes yet unless for some reason you are making non deductible contributions , which i doubt . all money is taxed instead when you draw it out .... every penny is taxed .,
the roth has you paying the taxes up front and nothing gets taxed later
I am confused indeed that’s why I am seeking the information and help.
I know the difference between a roth and traditional IRA as you broke it down. That was never my issue. My issue is this word “basis” and what exactly it means when we withdrawal the funds in retirement from this account that now has basis contributions.
And yes, we did indeed make non deductible contributions to our traditional IRA.
See the rules here from the IRS website for contributing to traditional IRA’s when covered by a retirement plan at work:
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