Bond conversions to Roth IRA
I have a few questions relating to transferring bonds from my traditional IRA to my Roth IRA
1) The price that has been assigned to the bonds for my transfer is higher than I have seen on investinginbonds.com for that day. Can I change the price that is reported on the 1099 when filing my return?
2) How is accrued interets treated as related to the conversion? Is the amount that was accrued to the bond while it was in the IRA added to the conversion price or is it ignored?
3) I transferred a bond on 12/15. That was the day that its interest paid. However, the interest went into the traditional IRA instead of the Roth. I was told that the account ownership post the day after the bond transfers and that I would have to do another conversion to get the interest into the Roth. The amount of interest is about $5K so I would like to avoid paying interest on this conversion (assuming the answer to 2) above is that there is no accrual in the traditional IRA). Is this delay in posting appropriate?
Permalink Submitted by Alan Spross on Thu, 2010-12-16 23:17
1) No. You would have to convince the IRA custodian to revise the 1099R. If still not acceptable, you could recharacterize the conversion. The 1099R figure should be no different than if you sold the bond in a taxable account and received a 1099B. That said, bond valuation can be complex.
2) When you bought the bond and paid accrued interest, that would be eliminated on the next coupon date. But if you converted prior to receiving the bond coupon, it seems logical that the custodian should reflect on the 1099R the accrued interest that a buyer would have paid to you had you sold the bond on the date of conversion. That would result in the bond value including the interest that it actually earned while you held it in the TIRA. But what seems logical to me may not be what the custodian actually does. You should probably discuss this with their tax Dept.
3) The 5k would retire the accrued interest you paid, but perhaps the delay is normal. In the end the 1099R should show the value of the bond including interest you earned up to the day of conversion. So if the 5 k remains in the TIRA, your 1099R should be 5k less than if you did the supplement conversion to move it into the Roth. You may or may not have a choice whether you want to convert the earned interest or not. The important issue is that the 1099R not be valued to reflect interest or any other value that did not get actually converted.