If you're like most taxpayers, anything you contribute to a traditional IRA cuts your taxes. A thousand dollars in your IRA is usually a thousand dollars you don't pay tax on. If your marginal income tax rate is 25 percent, making the contribution cuts your taxes by $250. As of 2013, you can contribute up to $5,500 a year to your IRA, or $6,500 if you're 50 or older.
If you're covered by a retirement plan at work -- such as a 401(k), SEP-IRA or pension -- you may get less of a deduction. As of 2013, you start losing the write-off if your modified adjusted gross income on a joint return tops $95,000. At $115,000, there's no deduction at all. Other filing statuses get different cut-offs. You can still contribute $5,500 to your traditional IRA, but you'll have to pay income tax on some or all of the money.
If your MAGI is between $95,000 and $115,000, you have to figure what percentage of your contribution is tax-deductible. Subtract your MAGI from $115,000, then multiply the result by 25 percent. If your MAGI is, say, $105,000, the final result is $2,500. Any contributions above that are regular taxable income and have no effect on your tax bill. If you have a different filing status, the number will be different from this example, but the principle is the same.
If you make contributions to a Roth IRA, it doesn't affect your taxes at all. Everything you put in a Roth consists of after-tax money, and the tax break comes later, during retirement, when withdrawals are tax-free. If you transfer assets from a regular IRA or a 401(k) to a Roth, it's going to increase your tax bill for the year. Transferring $30,000 from a traditional IRA, for instance, requires paying tax on the money you transfer -- in other words, you must change its status from "pre-tax money" to "after-tax" money, so your tax return for that year will reflect an extra $30,000 in income.
If you have after-tax money in your IRA, you don't pay tax on it when you convert it to a Roth, but you do pay on the interest it's earned. You don't get to transfer just the taxable or tax-free part of the account. If, say, 30 percent of your traditional IRA consists of after-tax contributions, 30 percent of your transfer is tax-free. If you have multiple IRAs, you must calculate the overall percentage of tax-free money and use that figure to determine what's tax-free. For example, if the one IRA has $60,000 with 60 percent tax-free -- $36,000 -- and your second IRA has $40,000 with 20 percent tax-free -- $8,000 -- you have a total of $44,000 of tax-free money in $100,000 worth of IRAs, which is 44 percent. Any conversion, transfer, or withdrawal you make, from either account, is 44 percent tax-free.