Q. I want to convert only a portion of the proceeds in my traditional individual retirement account to a Roth IRA. My traditional IRA has both pretax and after-tax contributions. I want to convert only the after-tax contributions to the Roth IRA and leave the pretax contributions alone.
Since I would be paying tax on the pretax contributions when I withdraw them from the traditional IRA anyway, I think the government should allow this. May I do this?
A. Although taxpayers may view IRA investments as discrete accounts to be dealt with individually, the government (and the Internal Revenue Code) has a different perspective.
According to this view, all the money we have set aside in IRAs is a single entity.
Sure, it may be parceled among various investments and some of it may have already been taxed, but in the end, the government recognizes one IRA per taxpayer identification number (which happens to be your Social Security number).
If you want to convert only a portion of your traditional IRA to a Roth, the government requires that the amount transferred reflect the relative proportions of pretax and after-tax proceeds in your account at the time of the transfer.
(A pretax IRA is one for which you have taken a tax deduction when opening the account. An after-tax IRA is one containing money on which you have already been taxed. Accumulated earnings for either type of contribution are always tax deferred until withdrawn.)
Remember, however, that at the time of any conversion to a Roth IRA, you will not be obligated to pay taxes on the full amount of the transfer if any portion of it has been previously taxed. You will owe taxes only on that amount that has not been previously taxed, such as pretax contributions and any tax-deferred accumulated earnings in your IRA accounts.
Here's how this might work: Let's say your have two IRAs. One, which you opened with pretax contributions, now contains $10,000, including $6,000 of contributions and $4,000 of accumulated earnings. The second contains $20,000, representing $15,000 in after-tax contributions and $5,000 in accumulated earnings.
In the aggregate, which is how the government views this, your IRA contains $30,000, $15,000 of which has been taxed previously and $15,000 (the $6,000 in pretax contributions and the $9,000 in accumulated earnings) that has not been taxed.
If you choose to convert only a portion of your IRA to a Roth, you must maintain this 50-50 ratio, because that is the relative proportions of pretax and after-tax money in your IRA.
Taxpayers with other ratios would of course follow those.
If you have never contributed to an after-tax IRA, all your IRA proceeds are taxable (and you may convert any portion of them to a Roth).
Perhaps the larger question here, though, is why anyone would want to convert only a portion of an IRA to a Roth.
If you qualify for the conversion--remember your adjusted gross income cannot exceed $100,000 whether you're married or single--and you've already decided that a conversion makes sense for you, then why not transfer your full IRA proceeds? Sure, your tax bite will be steep, but if you make the conversion in 1998, you will be able to spread the tax payment over four years. If you wait until 1999 or later to make the conversion, you must make the tax payment in a single year.
Q. I had two jobs last year. With multiple paycheck deductions, I know I have paid more of certain taxes than required. I know how to make a claim for excess Social Security withholding, but what about state disability insurance? Are overpayments refundable?
A. Look for the line on your California Form 540 tax return labeled "excess California SDI withheld."
The amount you place in that blank is added to your other withheld taxes and either reduces the amount you owe the state or increases your state refund.
Other taxpayers might be interested to know that they should go to line 58 of the federal 1040 tax return to list any excess Social Security taxes withheld from their paychecks. Again, your overpayment will either reduce the amount you owe or increase the size of your refund.
Carla Lazzareschi cannot answer mail individually but will respond in this column to financial questions of general interest. Write to Money Talk, Business Section, Los Angeles Times, Times Mirror Square, Los Angeles, CA 90053, or e-mail carla.lazzareschi @latimes.com