Determing basis value for Roth IRA conversion

Submitted by Philip Chauvet on Wed, 2009-12-23 05:15

Hi,

I’m looking to convert two traditonal IRA’s to a Roth in 2010 and am not having much luck determining what my basis value would be. The first IRA was funded through deductible contributions of 5,000 (spread through throug several years) and has a current value of 10,000. The second is rollover distributions from a qualified employer plan. The rollover amounts were 40,000 and the current value is 70,000. So the total value of these two is 80,000, but what is my basis value ?
Thanks for any help !

Best Regards,

Phil

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Permalink Submitted by Al Fry on Wed, 2009-12-23 15:52

There would be zero tax basis, unless some of the 401(k) rollover was after-tax money. If it was, then that would be your basis.

Permalink Submitted by Philip Chauvet on Wed, 2009-12-23 21:18

Hi ,
Thanks for the response. There are no after tax dollars involved, so a zero tax basis means the entire value of both will be considered taxable income, correct ? Or am I misunderstanding what zero tax basis means.

Thanks,

Phil

Permalink Submitted by Alan Spross on Wed, 2009-12-23 22:00

Zero tax basis means that:
1) All distributions are fully taxable
2) There is no possibility for an itemized deduction when closing the IRA in a conversion or distribution because your account value cannot be less than your basis when your basis is -0-.

Note that because you are paying full taxes on the conversion, the Roth IRA that results WILL have basis equal to the conversion. So if you close the Roth for less than the amount you converted, the shortfall would potentially be deductible because your basis is the amount you converted.

Permalink Submitted by Philip Chauvet on Thu, 2009-12-24 00:48

Thank you very much for the clarification and the timely answers. I’ll keep that in mind when the Roth gets closed.

Phil