Question on "basis" after conversion

[Guest skrambo]

Assuming a $35000 traditional IRA with a basis of $10000. If I convert the non-deductible $10000 to a Roth IRA shouldn't the basis of my traditional IRA -0- ? On my 8606 I still come up with $10000. Which is correct?

[John G]

Sorry, that is not how the math works. All of your regular IRA assets (including other accounts, if any) are pooled into one theoretical IRA to do the calculation. By "basis" I am assuming that you mean prior non-deductable contributions (such as 5 yrs * 2000). If you convert only 10,000 then you will be taxed on 71.4% of that amount since 28.6% of you IRA was previously after tax contributions. You just can't convert the original contributions by themselves.

For other readers, remember the pooling occurs even if you have different mutual funds. No selective conversions or gaming the system is allowed.

[This message has been edited by John G (edited 04-09-99).]

[Guest skrambo]

Whoa, your right. I assumed all non-deductible contributions could be converted to a Roth without being taxed, but I see now that the non-taxable part is a 'percentage' of the total converted. Thanks for the info. It's frustrating that a 1 page 8606 Form needs a booklet of instructions, and it's still difficult to understand. Heck, I had trouble understanding your answer. Does Andy Rathbone (Windows for Dummies) write books on tax forms? The IRS should hire him.

[John Olsen]

Skrambo:

Don't feel all alone. The 8606 Instructions would mystify ANYBODY! That form - particularly the part about Roth "re-characterizations" - is the stuff of which accountants' nightmares are made.

John Olsen

[Guest warren]

Regarding Partial IRA conversion to Roth whereby the Basis is equal to or more than the conversion.

Is there some dispute of the IRS 8606 form requiring the reduction of that basis by ratio of total IRA valuation.

I ask this because I feel that since you will be tying your money for 5-years (to avoid penality on what you are now will be taxed on) that should be treated differently than a straight distribution. And you will pay the tax in the rest of the IRA eventually.

[John Olsen]

Warren:

How could the basis in an IRA being converted to a Roth EVER exceed the amount being converted?

The basis of the converted assets is the same percentage of the total amount converted as the basis of the original "regular" IRA was of the total of those regular IRA assets.

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John L. Olsen, CLU, ChFC

Olsen Financial Group

St. Louis, MO

[Guest skrambo]

I've sort of drifted away from the original topic ((1)) BASIS ,

and I've been more concerned with ((2)) TAXABLE CONVERSIONS.

Getting back to #1,- I obviously figured my basis incorrectly. The instructions say complete part II first, and then in the 8606 booklet for part II it says complete lines 1-5 of part I. (duh) Anyway, it appears I need info from partI to complete partII and info from partII to complete partI.

#2 - I am greatly reducing the amount I am converting. I assume if I pay tax on the amount converted now, I won't have to pay tax when I withdraw from the Roth in 10 years.

[Guest warren]

Olsen:

My understanding back when I converted to Roth was that I would be able to take the full basis out of the IRA even if doing a partial conversion of all my IRAs. This was shown on at least one or two prelimnary financial worksheets. I was "told" that this is a still a point of interperation of the origninal Roth legislation.

What I want to ask is this being an issue or is the form 8606 treatment the law.

[Guest MICHAEL WESTRIVER]

I have a similar situaton, and I am wondering if there is any possibility of the IRS changing the rules on Conversions? There is also a 6% penalty to be paid annually on the basis or non-deductable portion left in the Traditional IRA. If I would have been aware of the penalty, I would have converted my $40,000.00 IRA to a Roth in 1998 and spread the taxes over 4 years. Now it is too late and I will be paying the penalty each year on my $4000.00 basis until I convert it all to a ROTH. Is there any hope for a rules change? I can not convert the whole amount in one year or I exceed the income limits.