I just recently converted an old IRA rollover account I had into a Roth IRA, in order to take advantage of the new program that allows you to spread out the tax bill for the conversion over the 2010/11 taxes years.
The original IRA was only about $2,000 at the time it was converted to a Roth IRA, so if I were to stop there my tax bill for the conversion would be relatively low (especially if spread out over 2 yrs.)
What I'm wondering is, if I then contributed the max for 2010 (another $5k) – would I be taxed on that as well, for a total of $7,000 in taxes? My first guess would be No, simply because I'm contributing dollars that have already been taxed.
Am I totally off-base here? Any insight would be greatly appreciated!
no if you are fortunate enough to know how much you contributed, you have a basis and the amount of growth since that time would be untaxed during the time you held it
your original contribution was a tax advantage so you know you have to account for that in your calculation of the taxable amount
so you should be able to document the amount that would be included in the taxable amount you are converting, if so, if there is a question about your claim, you have documentation to prove your case
You are not at all off-base. in fact, you are right on target. Your Roth conversion will be taxed for the $2,000 or so you converted. The $5,000 contribution was made using post-tax income and you will not be double-taxed.