Timing of conversion coupled with rollover from 401k

[Guest DLH1]

Taxpayer on 12/31/09 has a Traditional IRA of $30,000. Basis in this IRA with nondeductible contributions is $30,000. So the IRA has no appreciation.

Taxpayer also has a 401k with $200,000 in which he plans to roll over into Traditional IRA from former employer in 2010 or 2011.

Question - Taxpayer wants to convert Traditional IRA to Roth in 2010. Doing so would result in no additional tax liability since the FMV = tax basis. Lets say they convert in January, 2010. What effect, if any would the transfer of the 401k plan to IRA have on the ROTH conversion if it is done AFTER the conversion but in the same 2010 tax year. I assume you look at the value of all IRAs at the time of conversion and that any amounts added to traditional IRA's after the conversion have no effect?

Edited later - answered I believe lies in the form and instructions to form 8606.

In computing the basis used in the conversion, you divide the accumlated cost basis by the IRA distribution during the year PLUS the balance in the IRA as of the END of the year. therefore, if you happen to empty out the IRA earlier in the year, then transfer from a 401k to the traditional IRA later in that same year, the 401k would effect the out come of the conversion. So it would make sense to hold off rollovers from qualified plans until a later year.

[Guest MSDalt]

Since no experts have chosen to respond, I will take a shot as an amateur who made a conversion in 2008. As one who has used Form 8606, I concur with your assessment as noted in your "edit" above. On my conversion, I had expected that the tax would be computed on the basis of the amount converted divided by the value of all IRAs on the date of conversion. TurboTax (& 8606) used the amount of the conversion divided by the total value of my IRAs on 12/31/08.