ROTH IRA "Basis" in Comingled Account

[Guest Nonsequitur]

How do I determining the tax "basis" for ROTH IRAs (re: 8606 line 15) if the traditional IRA(s)converted to ROTH IRAs had comingled deductible (pre-1987)& non-deductible contributions?

My conversion amount totals over $83K because I'm a long time investor, and it came from some 20+ mutual funds.

Other Concerns: 2) The ROTH "income" for 1998 (even IF carried over four years)pushes me into a higher 31% backet (i.e. higher taxes); 3) I've read about penalties being slapped on for under-reporting income in 1998 due to "new found" ROTH income; 4)apparently I have to file to pay quarterly an estimated min. tax to avoid more penalties in '99,'00, '01.

I'm thinking of having to "recharacterize" about half of the converted funds back to Traditional IRAs just to avoid all the penalties let alone finding the money to pay for the taxes, and hit on my Misc. deduction threshold alone. Is there a spreadsheet on the web that you can point me toward that already has all the tax implications figured in for 98 and the out years?

Thanks.

I'm a first time BB user so pardon me if I should have made the above all diffent questions. I'm sure I'm not alone in discovering ROTH's downsides.

[Guest Del Rae]

I agree... ROTH IRAs are like most other things, that a little information can be dangerous sometimes... and unfortunately sometimes that all the information that we are given at the time.

The tax basis for Line 15 of the Form 8606 should usually come from prior Form 8606s that hopefully were filed when you made an IRA contribution but weren't able to deduct all or a part of it. The tax basis is basically a total of all of IRA contributions that you made but couldn't deduct.

One consideration that isn't often talked about is that you don't have to convert all of it in one year... even with the 4 year spread available for 1998, it's often good to plan certain amounts each year with an eye to where you move into a new bracket.

Anyway, that's my 2 cents... I recommend Roths to my clients that qualify, but the conversions do need some planning. We use specialized tax planning programs that help us project for numeral years. The programs over the WEB that I've seen are somewhat simplistic... I wonder if it wouldn't be worth your while to buy one of the cheap tax programs that are sold commercially (like TurboTax) and run scenarios by changing your conversion amounts.

Good luck!

[Guest Nonsequitur]

Del Rae, thanks for you input. I was tracking you thoughts and have already invested in Turbo Tax. Entering Roth IRA info in TT98 is very murkey. I've even found software errors in a couple of instruction. Essentially, I will go ahead and do this by long-hand to confirm TT's calcs.; keep everything converted and uncharacterized. Logic: Add up the total "distributions" (i.e.,which aren't really withdrawals) rptd on Forms 1099-R, subtract the Trad. IRA basis reported on my '97 Form 8606; then take 25% of that taxable conversion amount and enter it on 1040 Line 15c as INCOME.

This exact same taxable conv. amount. is similarly added as INCOME on 1040's for '99, '00 and '01. I (now) understand that the taxes owed for four four years may increase/decrease due to other itemizations totals, tax bracket creep, etc. No pain, no gain. Again, thnx for the response.

[John G]

I want to tag on with a few comments. First, bracket creep is unfortunate, but the big picture is that you have a wonderful tax shelter for the long haul. When you start spending your assets in retirement, the Roth should be the last asset that you want to touch. Some people will never touch their Roth and will pass it on to their family. For planning purposes you might want to add 5, 10 or 15 years to your retirement date. For example, you retire at age 60 but don't start taking $$ out of your Roth until age 70. I think it is a common error to assume that the Roth shelter ends the day you retire. For some people, they will effectively shelter investment gains for twice as long as some simple calculators presume. For example, if you are age 45 you may be talking about 35 years of tax shelter. The "rule of 72" (investment period in years to double is 72/%rate) says that at 10% annual investment will double every 7 years. For 35 years, that means 32x the original assets... which ussually dwards the tax creap problem.

[Guest Del Rae]

Ditto!!! The Roth is one of the nicest things to happen for estate plans in the last number of years. Thanks for the reminder.

[Guest nancys]

I have an IRA which I created with a trustee-to-trustee transfer from my ex-husband's qualified retirement plan pursuant to a qualified domestic relations order. The current balance is approximately $200,000. (This is technically not a rollover since I never had the money in my hands.)

I had another IRA which is a traditional IRA of about $65,000. This amount includes $11,000 of non-deductible contributions. Unfortunately, the CPAs doing my taxes failed to always file 8606's, but I have records to show my non-deductible portion. (I first found out about the 8606 when I started preparing my own returns a few years ago).

I converted the $65,000 to a Roth IRA in 1998. When I prepared my tax return, the software insisted tht I spread the $11,000 over both the $65,000 IRA and the $200,000 IRA. Needless to say, this caused a substantial increase in my taxable portion of the converted amount.

Since I have always kept the two IRA's separate, it seems that I should be able to allocate the entire $11,000 to the traditional IRA consisting of personal contributions. It doesn't make sense that now I have a basis in the QDRO-related IRA of $8,000, when there is really no basis in that account.

Should I amend my return and credit the entire non-deductible contribution figure of $11,000 to the converted $65,000?

nancys