Traditional IRA balances enter one calculation
A Roth conversion generally cannot be limited to after-tax dollars in one selected traditional IRA while ignoring the owner's other traditional IRA balances. Form 8606 applies an allocation using aggregate IRA basis, distributions and conversions, and year-end values. Traditional SEP and SIMPLE IRA balances generally enter this framework too. An owner funding a SEP through the business therefore needs to coordinate that contribution with a proposed nondeductible IRA contribution and conversion, even when different custodians hold the accounts. A nondeductible contribution creates basis when properly reported; it does not make the next conversion automatically tax free. Workplace qualified-plan balances generally are outside this IRA aggregation. That distinction may affect a retirement funding comparison, but employee costs, eligibility, fees, investment choices, and rollover acceptance still belong in the decision. Choosing a plan simply to change one personal conversion fraction can create a much larger company obligation.
Work the aggregate fraction
Assume an owner has $7,000 of properly documented nondeductible traditional IRA basis and converts $7,000 during a hypothetical year. At December 31 the owner also has $93,000 in traditional SEP and other traditional IRAs. Ignore earnings, other distributions, and special adjustments. The simplified denominator is $100,000: the $93,000 year-end value plus the $7,000 conversion. Basis is seven percent of that total, so only $490 of the conversion is nontaxable and $6,510 is taxable. The unused $6,510 of basis remains in the IRA basis record. At an assumed 35% marginal federal rate, the conversion produces about $2,278.50 of federal income tax before other effects. This is a hypothetical contribution amount, not a statement of the current annual limit. Actual Form 8606 instructions govern adjustments, rounding, prior basis, and other distributions.
Collect every account and basis document
List every traditional, traditional SEP, and traditional SIMPLE IRA owned by that individual, including dormant accounts and old employer-related arrangements. Obtain prior Forms 8606 rather than assuming the entire balance is pretax or trusting one custodian to know basis established elsewhere. A spouse maintains a separate IRA calculation; joint filing does not merge spouses' basis and balances into one percentage. Request projected December 31 values and include planned business SEP funding. Record the tax year designated for each contribution and the actual calendar year of every conversion. A contribution made by the filing deadline for a prior year does not change the calendar year in which a conversion happened. Reconcile Forms 1099-R and 5498, statements, and the return after year-end. These records explain why the converted account's own value was not the whole calculation.
Review a proposed plan rollover before processing
Some employer qualified plans accept eligible pretax IRA rollovers. If the owner's plan permits an appropriate rollover, that may change the IRA year-end balance, but the plan terms, asset eligibility, basis restrictions, and completion date control. Do not transfer after-tax IRA basis into a plan merely to empty an account. SIMPLE IRAs have additional timing restrictions, and required minimum distributions cannot be rolled over. Obtain written confirmation that the receiving plan accepts the precise dollars proposed for transfer. Compare investment expenses and distribution rights as well as the conversion result. A rollover that changes the fraction can still be unattractive if it forces the owner into unsuitable investments or leaves retirement assets inaccessible when needed. Account movement should follow a complete personal and employer-plan review, with confirmations retained alongside the conversion calculation.
Authorize a tax cost the household can fund
Compare the conversion tax, the costs of changing employer plans, employee funding obligations, and the owner's cash outside retirement accounts. Keep a projection showing conversion and no-conversion alternatives. Roth conversions generally cannot be undone through recharacterization, so discovering an old SEP balance after the transaction can be expensive. Do not use withholding from converted IRA money without evaluating the resulting distribution and possible early-distribution tax. Assign a person to refresh year-end balances before the last transaction is processed. Preserve the basis carryforward for subsequent years; unused after-tax dollars should not be taxed again because a form disappeared. The useful outcome is an informed funding sequence with accurate basis and a realistic tax reserve. It is not a promise that opening a second IRA makes every contributed dollar eligible for a tax-free conversion.
Sources & further reading
Consult the original guidance and its effective dates. These references support the educational discussion; their application depends on the specific facts.