(Another) IRA Conversion Tax Question

[Guest Wade Jackson]

Here's another tax question regarding the conversion of a traditional IRA to a Roth IRA. It's kind of long, but please be patient with me. It's a two part question:

Background:

At the beginning of 2000, I had a traditional IRA that was in two different accounts (2 different mutual funds). I also had a Rollover IRA in a third account that was rolled over from a previous employer's 401(k) plan. My basis in the traditional IRA is $12,000 (nondeductible contributions to the traditional IRA in previous years). Earlier this year I converted the traditional IRA (both accounts) into a Roth IRA (total approx $57K), but I left the Rollover IRA alone.

I was reviewing Form 8606 to get a better handle on my tax situation for the year, and I have a question regarding Line 6. This line asks you for the "total value of ALL your traditional IRAs as of December 31 ...." This amount will determine what percentage of the basis you can claim and thus reduce your taxable portion of the conversion.

Question 1:

I could not clearly tell what traditional IRA means. Is my Rollover IRA (from my previous 401k) actually treated as a traditional IRA on Form 8606, Line 6? If not, then I can use the entire $12,000 basis against the conversion leaving a taxable portion of approx $45K. If the Rollover is considered part of the traditional IRA, I will only get to use approx $4K of the $12K basis to reduce the taxable conversion amount to $53K. This is about a $2,500 tax difference.

Question 2:

If the Rollover IRA is considered part of my traditional IRA on Form 8606, Line 6, then may I roll my Rollover IRA into my present employer's 401(k) plan before the end of the year leaving a zero balance in the traditional IRA? This would make Line 6 = zero, and I could use my entire basis in reducing the taxable portion of the conversion. Is this okay to do, or would the IRS impose a tax anyway?

I really would like to leave the Rollover IRA as an IRA and not roll it to a 401(k) for flexibility reasons. Also, I may want to convert part of it to a Roth next year. However, for a $2,500 tax savings, I would roll it into my 401(k).

Thanks for your help (and patience in reading this long thread)!

[BPickerCPA]

You have to include ALL IRAs in the calculation.

If you move the rollover IRA back to a 401k, it looks to me like you will save the tax.

BArry