Value of IRA for calculating pro-rated basis in a conversion to a Roth IRA

[Guest judorock]

My understanding is that you must add together all your IRA money when calculating how much of your basis in any IRA account is credited against a conversion of part of your IRA money to a Roth IRA. So, for example, assume I had two IRAs, one with $10K value and an after tax basis of $4K, and a second IRA with $30K and no basis. If I convert the first to a Roth IRA, I can only exempt $1K of the $4K basis since it is pro-rated on the total amount ($4K times $4K/($10K+$30K)). The same rule would apply to a distribution as a conversion.

My question is when do you calculate the value of the IRAs for the purpose of prorating the basis - at the time of the conversion, or at the end of the year for tax purposes. Suppose that the $30K is in a 401k. Could I convert the $10K IRA and exempt the full $4K basis in March, then in July roll over the $30K 401k into an IRA. The tax return would show a distribution from an IRA with an exempted amount, a residual basis of zero, and $30K still in an IRA.

[Mary Kay Foss]

The basis allocated is determined at year end. See Form 8606 for the process. It can be tricky, I know someone who only had an IRA with nondeductible contributions in it that he converted to Roth. In December, he was terminated and rolled his 401(k) into an IRA. That made the tax on the Roth conversion much greater than he expected.