The way that the IRS does this is, they take a look at your account balances as of December 31 of the year that you are making the conversion. This is something that’s actually tripped me up. I thought it was as of the date of the actual conversion, but it’s not, it’s as of December 31.
So we’ve gotten lots of questions about, what if I do this first? What if I do this later? What if I do something out of order? What’s the impact? The magic date to look at is December 31, so if you can get yourself in a position where you have no regular deductible traditional IRA money as of December 31, and then you do the conversion of the non-deductible amount, then you’re in a position where you’re not going to have to pay extra tax on the conversion, and that’s where you want to be.
Some other questions we’ve gotten have to do with, what kinds of IRAs do you look at? It turns out you look at not only traditional IRAs, just the regular retirement accounts that anybody can open, you also look at some of these simplified retirement plans, like SEP IRAs and simple IRAs. You have to take a look at that too.
So if all of your regular traditional IRA money is nondeductible, but you had some pre-tax money in these simple or SEP IRAs, you’re going to have to add those up, you’re going to have some pro-rata issues.
Now, the fun thing is that the rules are not the same for money that’s in a 401(k). If you’re fortunate enough to have a 401(k) plan that allows you to put in both pre-tax money and after-tax money into the 401(k), the IRS specifically allows you to say, hey, I just want to convert the after-tax 401(k) money to a Roth. That’s totally fine, because it’s coming from the 401(k).