Traditional IRA to Roth Conversion - HELP

[Guest pfspuppy]

Hi,

I hope there is someone that has either had the same problem as me or similar situation in the past.

I did a Rollover last year from my Traditional IRA to my Roth.

I had a LONG stock position in the account valued at apprx 11,802

I had a SHORT option position in the account (covered call - in the money) valued at (-3340)

Cash of $2,030

The net value of my account was $10,492 but on my tax form from the brokerage, it is listed as 13,832. It seems like the short call position that was transferred over was not counted. Is this correct? Why?

Should I be reporting the 10,492 or the 13,832 to pay the Rollover tax on?

Thanks

[John G]

You need to call the IRA dept at your custodian. Don't talk to a general sales person or anyone at the front counter of a walk up. The back office is more familiar with IRA accounting and conversions.

The Roth conversion should be valued as a net account value on the exact date the conversion was made... not the end of year value or the value when you made the request. Your monthly statements should help you get close to this number. You can also use the "historic prices" option on the internet to try and replicate the values at the close on the day before and the day of your conversion. It is not clear from your facts that the custodian made a wrong calculation. I am not sure that you can offset the covered call "loss" unless you bought it back - - that's an accounting issue that others can address. There is also the question of the conversion date vs the option expiration date.

I also had a valuation problem with part of a Roth conversion. The custodian never made a note of the valuation of a thinly traded stock on the date of conversion and instead just used the year end stock price - which was about 34% higher. They were able to correct the error - but it took a few phone calls and a letter.

Start now on this issue. If you can't get it resolved, you have the option of reversing the conversion and instead converting in 2007.

Options?

You say nothing about you other investments or investment experience. If this is your only investment, I would not be holding one stock and selling covered calls. There are higher transaction costs and bigger percent spreads with options. In the asset range you show, it is not terrible efficient to use options.

You refer to your option as a "short position" which is not technically correct. You sold a call for a stock you held (a covered call) and kept the premium. Because the stock rose in value, buying back the call would have cost more than the premium you recieved when you sold the call. It looks like holding the stock and not selling the covered call was the better choice in this example. You can not "sell short" or use margin in an IRA/Roth account.

[Guest pfspuppy]

For the record, this IRA is small relative to my other assets so I think from a diversification standpoint it gives you a bad example.

I called the IRS, they werent really helpful and said call the financial institution since they go by what is reported to them. Called the brokerage and they said that they report CASH and EQUITY positions to IRS and not OPTIONS. I asked them what I do with the option position and they told me to talk to a "Tax Advisor".

I am wondering if I include the brokerage statements with an explanation the IRS would accept that?

You need to call the IRA dept at your custodian. Don't talk to a general sales person or anyone at the front counter of a walk up. The back office is more familiar with IRA accounting and conversions.

The Roth conversion should be valued as a net account value on the exact date the conversion was made... not the end of year value or the value when you made the request. Your monthly statements should help you get close to this number. You can also use the "historic prices" option on the internet to try and replicate the values at the close on the day before and the day of your conversion. It is not clear from your facts that the custodian made a wrong calculation. I am not sure that you can offset the covered call "loss" unless you bought it back - - that's an accounting issue that others can address. There is also the question of the conversion date vs the option expiration date.

I also had a valuation problem with part of a Roth conversion. The custodian never made a note of the valuation of a thinly traded stock on the date of conversion and instead just used the year end stock price - which was about 34% higher. They were able to correct the error - but it took a few phone calls and a letter.

Start now on this issue. If you can't get it resolved, you have the option of reversing the conversion and instead converting in 2007.

Options?

You say nothing about you other investments or investment experience. If this is your only investment, I would not be holding one stock and selling covered calls. There are higher transaction costs and bigger percent spreads with options. In the asset range you show, it is not terrible efficient to use options.

You refer to your option as a "short position" which is not technically correct. You sold a call for a stock you held (a covered call) and kept the premium. Because the stock rose in value, buying back the call would have cost more than the premium you recieved when you sold the call. It looks like holding the stock and not selling the covered call was the better choice in this example. You can not "sell short" or use margin in an IRA/Roth account.

[Guest allancoleman]

Although it may be alittle late for you , pfspuppy , the advice I'm about to give may help someone else reading this : I always close out any positions in my Traditional IRA account and go to cash BEFORE doing my Roth conversions from that account .