I made both pre-tax and, in later years, after-tax contributions to my IRAs. I have kept the contributions separated in different accounts. I am considering converting to a Roth IRA, and am wondering if I will get tax credit for those after-tax contributions? -- Name withheld

Your accountant will adore you for keeping your deductible ("pre-tax") and non-deductible ("after-tax") individual retirement account contributions in separate accounts, which makes his job easy. But the Internal Revenue Service doesn't care, as long as you're able to figure out which prior contributions to your traditional IRAs were taxed and which were not. Uncle Sam will grant credit for taxes paid on IRA contributions.

Since Roth IRA contributions are all after-tax, those choosing to convert from traditional to Roth IRAs must pay tax on the portion of contributions that were not previously taxed. The IRS rule calls for converters to pay taxes on a pro-rated basis: Pool your traditional IRA contributions together, and then calculate what percentage of contributions was pre-tax and what percentage was after-tax. If $40,000 of the $100,000 you've contributed to a traditional IRA was non-deductible—meaning you've already paid taxes on it—then 60% of funds you convert from a Traditional to a Roth IRA are taxable, no matter how much of the traditional IRA you decide to convert to a Roth.

"If you convert the whole thing then anything above the after-tax, non-deductible contributions get taxed in the process of conversion. It's taxed at your regular income tax rate since it becomes part of your income for that year," says Bill Flemming, Managing Director at PWC's Private Company Services Practice.

The advantage of converting to a Roth is that your Individual Retirement Account will no longer be subject to taxes. "The beautiful thing about a Roth is that all distributions are tax-free," says Flemming.

But that does not mean everyone should convert.  High earners are likely to be in a lower tax bracket once they retire. So they may be better off remaining in Traditional IRA's and paying taxes on distributions once they've left the work force.

-- Allan Chernoff

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