Editor's Note: This article is part of the Financial Advisor series "How I Solved It." Advisors describe a client with a problem and what they did to help.

Forrest Baumhover, a financial planner at Lawrence Financial Planning, in Tampa, Fla., says his firm has 10 to 15 doctors on its client list. One of his clients, a younger doctor, had spent many years contributing to her IRA plan. “She’s always been a good saver,” Baumhover said, describing her as someone who does the right thing and saves as much money as possible.

“At some point, she just creeped out of her tax bracket … where her income made her ineligible to deduct her IRA contributions.” (Those in employer-sponsored plans have their deductions phased out after they trip over certain adjusted gross income levels.)

She had been saving the max all this time and over the years she went from being able to deduct contributions to not being able to deduct them, but still kept putting money in.

She came in during a meeting, and said, “I’d like to convert to a Roth account. Tell me what that looks like,” he recalled.

Baumhover thought this was a good chance to do a “backdoor Roth conversion.” This happens when clients move nondeductible contributions in traditional IRAs to Roth IRAs. These conversions must be reported to the IRS on Form 8606. (The Tax Cuts and Jobs Act of 2017 validated these types of conversions.)

People go for backdoor Roths when they already contribute to an employer-sponsored plan and their income level does not allow them to deduct traditional IRA contributions, Baumhover said.

The rub, however, is when you mix IRA contributions you have taken deductions on with those that you haven’t. “The problem was having pretax and after-tax money in IRA accounts, compounded by the fact that they were actually in the same account,” he says. “Just having both types of money in the pretax account would have caused a huge tax bill if she had tried to convert [to] the Roth directly. She would have had to declare as income all of the pretax contribution, which was significantly more than the Roth amount. So that was the problem.”

According to IRS distribution rules, all contributions inside all your IRAs are aggregated and the conversion dollars would be taxed pro rata. Wells Fargo calls this the “cream in the coffee” rule: Once they are mixed, they can’t be unmixed.

For example, let’s say you had reached $200,000 in IRA contributions you were able to deduct and $100,000 in after-tax contributions and your new balance is $300,000. You decide to convert $100,000 to a Roth. You would think this means you can take out $100,000 directly from nondeductible holdings and pay no taxes on the Roth conversion, but you are wrong. Instead, since the nondeductible amount was only one-third of all contributions, only one-third of that total escapes taxes, and two-thirds of your Roth conversion must be calculated on your pretax contributions. Two-thirds of the $100,000 ends up being $66,666 you will end up paying taxes on to convert.

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