I have a client who made a $50,000 SEP contribution and $5000 nondeductible IRA contributions for himself and his wife, $10,000 total. These were for 2012. The broker then advised the individual to convert the $5000 of nondeductible IRA contributions to a Roth in 2013 for both of them. The investment representative has the client understanding that this is a nontaxable conversion however I disagree. I believe it goes as follows, please help me out if I misunderstand. The nondeductible IRA contribution of $5000 for the taxpayer has to be prorated over the $55,000 of IRA contributions that were made since the SEP contribution is considered an IRA contribution. I am assuming no earnings for this example. ( 5000/55000 = 9% ) Therefore, $450 (5000 * 9%)of the conversion for the taxpayer would be nontaxable and the other $4550 would be taxable conversion. For the spouse it would be a full tax free conversion if no earnings and no other IRA accounts. If I am correct, any ideas on what to do now?
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