Basis on Roth Conversion with 401K Rollover Unconverted?

[Guest SONNI]

Hi,

I had 2 IRAs in 98, one Contributory IRA and one Rollover IRA which was funded from a 401K plan at an old employer. My contributory IRA had a cost basis from some non deductible as well as deductible contributions but my rollover had no cost basis since it was all pre tax money. I ended up converting all of my Contributory IRA but didn't convert any of my Rollover IRA to a Roth IRA.

On form 8606, it says that I need to include the value of ALL my traditional IRAs. Does that mean that I need to include my rollover as well? If so, then my basis gets spread between the value of the rollover and the value of the new Roth and I can't deduct my entire cost basis from my Roth conversion even though all the non deductible contributions took place in that traditional IRA that was converted to the Roth? Is this the case? Seems a bit unfair to me? Or am I missing something here? Also, that would mean that I would have a cost basis for a rollover IRA which technically shouldn't happen since all of that money came from tax free money in a 401K plan in the first place?

Thanks in advance for the help.

[Kathy]

SONNI,

No, you're not missing anything. All of your IRAs are lumped together for determining the percentage of any distribution in which you will have a tax-free return of basis. This means that you will now have a basis in your rollover IRA and my gut feeling is that, if you roll it over into another employer sponsored plan in the future, you will continue to have a basis in it but I'm not sure how the reporting goes from there . Wierd, huh??

Kathy