cost basis Roth
You can transfer the taxable portion of an IRA to a 401(k) and keep the cost basis in the IRA. Later the IRA can be rolled into a Roth tax free except for any additional appreciation after the 401(k) transfer. My question is what is the cost basis? Can I allocate any group of funds to the cost basis regardless of how much was paid for that fund? In short can I allocate to cost basis a highly appreciated fund as long as the current value equals the cost basis? The rest of the IRA could be considered taxable?
Many thanks as always … Mary
Permalink Submitted by Alan - IRA critic on Tue, 2013-08-20 19:22
It is much simpler than this because individual holdings cost or gains are immaterial. The cost basis for a Roth IRA is the amount of regular and conversion contribution you make to the Roth. The gains in a Roth IRA are the excess of the Roth value over the total of your contributions. You do not have to do any allocation based on the cost of individual purchases. When you do a tax free IRA conversion as in your case, the Roth will have a cost basis equal to the value converted regardless of holdings and regardless of whether you paid taxes on the conversion. However, a tax free conversion does not have a 5 year holding period to avoid a 10% penalty because this penalty only applies to the taxable portion of a conversion. The same applies to a traditional IRA, so any holdings you transfer to the 401k plan are automatically deemed to be the taxable portion of your TIRA regardless of which holdings are transferred to the 401k. Form 8606 is used to report the conversion to the Roth IRA and also to record your basis from non deductible contributions to the TIRA. Again, the only cost basis in your TIRA comes from making non deductible contributions or rolling over after tax amounts from an employer plan and recording this cost basis on Form 8606.
Permalink Submitted by Mary K. Dean on Tue, 2013-08-20 20:41
THanks Alan