Conversion of voluntary contribution to Roth IRA

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Q: I will be retiring on Jan. 1. I recently contributed $50,000 to my Voluntary Contribution account. This is my first contribution to this account, and upon retirement I would like to transfer the entire balance directly to a Roth IRA. I have an existing Traditional IRA (never taxed and balance of approximately $65,000) and a Thrift Savings Plan account of approximately $245,000. My goal is to transfer the entire amount of my voluntary contibution directly to an existing Roth IRA upon retirement. My thought is that the only tax I would owe on this conversion would be the few hundred dollars I earned in interest on the Voluntary Contribution account.

My questions are: Will the Office of Personnel Management permit the direct transfer from a Voluntary Contrtibution account in a Roth IRA? And, if so, is my assumption correct that the only taxes I would owe would be the few hundred dollars in earning on this account (since I will not be co-mingling this money with either my Traditional IRA or TSP account)?

A: The OPM will permit you to roll or transfer your withdrawal to any account you designate, except that the contributions portion may be rolled directly into a TSP account, since the TSP will not accept post-tax dollars.

While I can’t comment on how much tax you will actually owe, you will have to aggregate your Traditional IRA balances for purposes of determining the taxability of your conversion. This means that your conversion amount will be deemed to include a portion of your untaxed IRA balance that is proportionate to the share of the aggregate IRA balance you’ve converted.

For example, if you covert $50,000 from a VC account and you have a pre-tax $50,000 Traditional IRA balance at the time, $25,000 of your converted amount will be deemed to be a coversion of pre-tax money and subject to tax. After the conversion, your Traditional IRA will then be deemed to have a tax basis of $25,000, so you will ultimately be able to withdraw that money without tax later.

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  1. The IRS will look at the cost basis of your Voluntary retirement program. If the current fair market value of your VRP is $50,000 and you convert this entire amount to a Roth IRA, then the conversion taxes will be your tax bracket x $50,000.

    Thus if you are in the 25% tax bracket, you’re looking at paying $50,000 x 25% = $12,500 in federal taxes. Correct me if I’m wrong here somebody but I’m pretty sure that’s how it works. This article on roth conversions should help too http://www.definerothira.com/better-understand-roth-ira.html

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