Contribute to a traditional IRA without deducting it, convert it to a Roth, and if the
account held nothing else the conversion is close to tax-free. What breaks it is an aggregation rule
in the statute that most people meet only after they have already converted — and the group
most exposed is precisely the one that rolled an old employer plan into an IRA on changing jobs,
which is nearly everybody who has changed jobs.
What you hold
The rulebook, verified
All your IRAs are treated as ONE contract verified
The statute provides that for these purposes ALL INDIVIDUAL RETIREMENT PLANS SHALL BE TREATED AS 1 CONTRACT, all distributions during any taxable year shall be treated as 1 DISTRIBUTION, and the value of the contract and the investment in it are computed as of the close of the calendar year in which the taxable year begins, increased by the amount of any distributions during that calendar year. You cannot point at one account and convert only from it. The law looks at the whole.
So a conversion is taxed on the RATIO, not on the account you picked verified
Because everything is one contract, converting is treated as taking a proportional slice of all pre-tax and after-tax money across every traditional, SEP and SIMPLE IRA you hold. Somebody with a large rolled-over pre-tax balance and one small non-deductible contribution does not get a tax-free conversion of the small one — they get a conversion that is mostly taxable, in the proportion the balances stand in. Nothing about which account the money physically left changes that.
The rollover that caused it usually happened years earlier verified
The balance that ruins the arithmetic is most often an old employer retirement plan rolled into an IRA on leaving a job — the tidy, sensible thing to do, done long before anybody considered a conversion. This is why the rule catches experienced people rather than beginners, and why the question to ask is not 'what is in my IRA' but 'what have I ever rolled into one'. Whether a balance can be moved back out of the way is a real question with a real answer, and it is one for a preparer who can see the whole picture.
The measuring date is the year end, not the day you converted verified
The value is computed as of the CLOSE of the calendar year in which the taxable year begins, increased by any distributions made during that calendar year. Converting in January does not lock in January's balances, and clearing an IRA in December does not undo a conversion made in March — the distribution is added back. The timing intuition most people bring to this is the wrong one, and it is wrong in the direction that costs money.
No tax figure and no income threshold appears on this page. The tax depends on
the whole return; the income limits that make this manoeuvre interesting are indexed annually and
would be stale inside this page’s own re-verification window. What is stated is the mechanism,
because the mechanism is the part people do not know and it is what decides whether the plan works at
all. Whether a pre-tax balance can be moved out of the way is a real question with a real answer, and
it turns on the receiving plan’s terms — a preparer who can see everything is the person to ask.
We already computed the public version — it is complete and stays free.
Keep a list of every retirement account you have ever held and the Square has it at conversion time: Join DesiSquare and the Square remembers your dates, re-runs this
when the rules change, and puts a credentialed human one message away.