Avoiding tracking cost basis after Roth conversion
I have a Rollover IRA (401K rollovers only), a Classic IRA (non-deductible only), and a Roth IRA (while I was allowed to contribute to a Roth IRA). I would like to convert my entire Classic IRA, and a portion of my Rollover IRA to a Roth IRA, without having to track the percentage cost basis between my Rollover IRA and my Classic IRA. My plan is to roll part of my Rollover IRA into my current 401K. Then I would convert the entire remaining Rollover IRA and Classic IRA into a new Roth IRA (in case I have to recharaterize later – just in case). I have a couple of questions.
Note: I know I have to check with all my current account custodians to ask if this is allowed.
Is this allowed by the IRS? I think it is. I”m not trying to avoid paying taxes, I’m just trying to reduce my own bookkeeping.
If I spread the taxes over 2011 & 2012, does that lower my AGI for 2010? Or do I get the full hit on AGI in 2010, and just put off paying the taxes until 2011 and 2012? I’m looking to avoid being taxed in the 33% category.
Thanks.
George
Permalink Submitted by Alan Spross on Wed, 2010-02-24 03:50
The key is whether your current 401k plan allows incoming rollovers from IRA accounts. Having a rollover IRA from a former employer increases the chances of success because some plan will only accept rollovers from rollover IRAs. But you will have to check with the plan administrator and then follow their instructions. If the plan will accept rollovers, there is no reason why they would not accept less than 100% of that rollover IRA.
IRS rollover rules permit this transfer. It is up to each plan to permit it or not.
You still needed to file Form 8606 each year you made non deductible IRA contributions and you will need that form again to report your conversion to a Roth IRA. Since you will be converting all your IRA values remaining, the total of non deductible contributions you made and reported on the 8606 forms will be the tax free portion of your conversion.
You then have a choice to defer the income to 2011 and 2012 in equal amounts or to opt out and report the entire conversion in 2010. If you defer the income over the two years, your 2010 AGI and taxable income is not affected whatsoever by your conversion. The tax you will owe in 2011 and 2012 will be based on your total taxable income and the tax rates in those two years. If you decide to recharacterize all or part of this conversion, the deadline for that is 10/17/2011.
Be sure to get the rollover to the 401k plan done first, as this is the only part where you need to get permission and it is the toughest part. Then do your conversion after that is successful. And be sure that your 8606 forms from the prior years are correct and current.