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conversion of non deductible ira

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    conversion of non deductible ira

    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?

    #2
    I agree with you

    At first I thought you were wrong. Then I decided to look at line 6 on Form 8606. It says include all balances in IRA, SEP and SIMPLE.
    If SEP is part of IRA balance when withdrawals are made they must be part of IRA for conversions.

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