3713.03 / Is there any way to execute a non-taxable Roth conversion?

While most IRA contributions are made with pre-tax dollars and generate current tax liability when converted, it is also possible that the taxpayer’s IRA could contain nondeductible contributions—called the IRA “basis.” Taxpayers are not required to pay tax on IRA basis when converting to a Roth. Tax on conversion is instead applied on a pro rata basis so that only pre-tax dollars are taxed. For taxpayers with after-tax IRA funds, it may be possible to use exceptions to this pro rata rule to isolate basis and execute an entirely nontaxable Roth conversion.

Most traditional IRA contributions are made with pre-tax dollars to reduce the taxpayer’s current taxable income. However, once a taxpayer’s income exceeds the annual inflation-adjusted thresholds, the tax deduction for the original IRA contribution is no longer available (i.e., the taxpayer is not able to make pre-tax contributions to the IRA). A taxpayer can, however, make nondeductible contributions to an IRA even when their income is too high to qualify for a tax deduction.

These nondeductible contributions form the “basis” in the IRA and can be converted (or withdrawn) tax-free (unlike traditional, deductible contributions, which are taxed when converted). After-tax funds that are rolled over from another retirement account will also be added to the account’s basis.

In other words, it’s entirely possible that the taxpayer could have both pre-tax dollars and after-tax dollars in the traditional IRA. Taxpayers can’t “pick and choose” which dollars to convert to a Roth.