2010 IRA -> Roth Conversion

[Slicer]

I'm interested in converting after-tax T-IRA money to a ROTH IRA in 2010 (when the income limit is lifted).

($$ values used are just an example)

after-tax T-IRA = $10,000
(due to the bad market, there's no gains -- actually there's a loss from what I invested. all of this money is after-tax and isn't subject to further taxes)

pre-tax ROLLOVER IRA = $100,000
(none of this money has been taxed)

So, if I convert the "after-tax IRA" to a ROTH, do I:

a) pay no taxes because 100% of this is already after-tax money?

b) pay taxes on (roughly) 91% of the $10,000 because the T-IRA is (roughly) 9% of my total IRA accounts?

From what I understand when you remove money from a retirement account ALL IRA accounts are combined to determine the taxable portion (as I've somewhat outlined in option "b").

If that's the case, not only would I have to pay taxes on money that actually LOST value in the past year, but my pre-tax IRA would now have some implicit non-taxable portion to it??

[KTP]

Unfortunately for you it will be option B:

The IRS doesn't treat your two accounts differently for the conversion, so for them you have a $110,000 account with $10,000 of post tax contributions. You are screwed.

I am in the same boat due to savy (read, lucky) investing. My rollover IRA is now $30,000 (it rolled over at $1700 but I made a lot of risky moves that paid off) and so if I try and start another non-deductable IRA to do the Roth thing I will have to pay a % of taxes on it based on this rollover IRA even if I don't touch that one. Make sense?

Income limit on Roth IRA is stupid. Everyone should get the chance to save for retirement. Tax my current income a bit more if you want but give me the option to have the same retirement nestegg as the guy who lives in bum**** Nebraska and has a cost of living half of what I do on the left coast but can contribute because he makes $10,000 less and falls under the limit.

bitter?

[EEinNJ]

I'm just looking into this myself. Schwab's investing magazine has an article on IRA conversion.

I don't think you have to convert the whole account. You are essentially taking a distribution as ordinary taxable income, which then is recharacterized as a Roth IRA. There is a max of 100K AGI eligibility. The eligibility limit for an annual Roth contribution are higher, IIRC.