IRA - Rollover of Assets

[Guest AJ Milano]

When securities are Rolled Over from a Qualified Plan to an IRA, the market value of the securities at the time of the rollover become the cost value of the security in the IRA. I am looking for documentation of this rule somehwere. Does anyone know where I will be able to find this in the Regulations?

Thank you for your help.

[QDROphile]

What does "cost value" mean and what effect does it have?

If what you are talking about is basis (after tax amounts) in the qualified plan or the IRA, then I disagree with your premise that the market value of distributed securities has that direct connection with basis. Under certain circumstances there may be an indirect connection.

[Guest AJ Milano]

"Cost Value" is the actual amount paid for a security. I am looking for documentation that states that the Cost Value is stepped up to the market value at the time of the IRA Rollover in the IRA. Essentially, the cost value of the security in the IRA becomes the market value of the security in the QP at the time of the Rollover.

[BPickerCPA]

The "cost value" has no relevancy, since upon distribution from the IRA the recipient will have ordinary income. IF there is after tax money in the qualified plan, then that amount becomes (additional) basis in the IRA.

Under the tax rules, any non taxable transfer, such as from a qualified plan to an IRA, will generally NOT result in any step up in basis.

[QDROphile]

I don't know the answer to your question. But more important, I don't know what difference it makes.

A distribution from a traditional IRA is taxed at ordinary rates, so it does not matter what the basis is of the asset that is liquidated for distribution or distributed in kind.

If the IRA has after tax amounts, the tax basis of a distribution is not determined by the cost of the assets that are liquidated for distribution or distributed in kind.

[Appleby]

I think AJ Milano is talking about the possible difference in value of securities, between the time the securities are distributed form the qualified plan to the time the securities are rolled over to the IRA.

For instance, assume 100 shares of XYZ are distributed from a retirement account today. Assume the value of the 100 shares if $1,000 ($10 per share).

The 100 shares of XYZ are rolled over a few days later. At the time of the rollover, XYZ is prices at $15 per share. The rollover value will be $1,500.

If my assumption on your question is correct, then I am not sure that you will find any reference that meets that explicitness. Publication 575 talks about rolling over property from a qualified plan to an IRA…publication 590 says if a distribution of property is made from an IRA, the same property must be rolled over- not the same value. It is very likely then, that when securities are rolled over, the value will be different from the value at the time of distribution when the rollover is made. This means that the 1099-R and the 5498 will reflect different figures- but that’s OK. A letter of explanation can be attached to the tax return to explain the discrepancy. The end result, the

[Guest AJ Milano]

I want to thank everyone for giving their input, but let me ask the question in a different way.

I am not talking about cost basis in the context of the distribution in the IRA. I know that the IRA will be taxed at ordinary income at distribution.

I am saying that when securities are rolloved over from a Qualified Plan into an IRA, The current market value of the securities in the QP become the cost basis in the IRA. This is where the amount in Box 1 (Gross Distribution) with a Code "G" in Box 7 comes from on the 1099 R , and on the 5498 in box 2, (rollover contribution) For example:

John Doe is a sole participant of the MY FAMILY 401 (k) Plan : He rolls over 100 Shares of ABC Corp into his IRA today. The day of th rollover ABC Corp. has a cost of $200, and a market value of $500. ABC Corp is trading for $5 a share. John Doe will get a 1099 R from the MY FAMILY 401 (k) Plan for $500 in box 1, G in box 7 for Direct Rollover. Also, for his IRA, he will get a 5498 with $500 in box 2, for the rollover contribution. In this case, both the 1099 R and the 5498 will equal, because it was a direct rollover.

My question is what cost basis do I use to receive the asset into the IRA? I know that cost basis is not relevant for IRA's but to be consistent with the reporting done above, I suggest bringing ABC Corp. it in at the stepped up basis, which is equal to the market value at the time of the rollover.

Does this make sense?