Taxation on conversion to Roth IRA

[MoShawn]

Have a client who wishes to convert their current IRA to a Roth IRA. Current IRA is invested in stocks, with a cost basis of $100/share and market value of $300/share.

When doing the conversion, is the amount includable in income based on the $100 cost basis, or the $300 market value?

[masteff]

IRS Pub 590, page 28: "Income. You must include in your gross income distributions from a traditional IRA that you would have had to include in income if you had not converted them into a Roth IRA." http://www.irs.gov/pub/irs-pdf/p590.pdf

[Guest jims]

You'll want to look at client's Form 8606 to determine deductible vs. non-deductible contributions to help figure out the income.

[MoShawn]

Does the answer change if this is employer stock, and the $200 difference is unrealized appreciation?

[Guest jims]

The investment doesn't matter. 'Employer stock' technically only exists in a qualified plan, not an IRA. Once its in an IRA, it just another stock like any other stock. I gather the whole value is taxable income since you seem to imply it may be a rollover IRA, unless there are after tax contributions. Look at pub. 590 so you'll be able to determine.