IRA to Roth Conversion with Other IRAs
Have married clients. They each have a traditional IRA and a Roth IRA and the husband has a SEP IRA that he funds. I know that if I convert any of his traditional IRA to his Roth, due to his SEP, we will need to track the basis. However, since the wife has no other IRAs, if we convert her entire balance that is in her IRA to the Roth IRA there would be no basis to track since she has no other IRAs, correct? I want to be certain since they file a joint return, that her conversion would not somehow cause basis in his IRA or SEP. Thank you for your expertise and help.
Permalink Submitted by Todd Martin on Thu, 2015-03-12 22:24
Client started the year with his SEP IRA and funds it monthly. He is going to make more money this year, wants to contribute more into a retirement plan than the 25% of wages, without increasing his wages. Can I open a Solo K for him, stop making contributions to the SEP IRA, and have him fund the Solo K instead? Or since I started the year with the SEP and have funded it, am I stuck with the SEP for the entire year and can’t consider the Solo K until 2016? If I can do the Solo K for 2015, do I need to do a return of excess from the money he contributed to his SEP. Thank you for your help and expertise.
Permalink Submitted by Alan - IRA critic on Thu, 2015-03-12 23:17
While it is not clear that the husband has any TIRA basis in the TIRA (SEP would not have basis), but if he does it would not be affected by his wife’s IRAs since each spouse’s IRAs are totally separate from the other with respect to basis and pro rating of basis. Note that basis in a TIRA comes from making non deductible contributions that are documented on Form 8606 separately for each spouse. If husband does have such basis and was to convert, the SEP IRA which has no basis would reduce his basis % and cause his conversion to be mostly taxable. If he has no basis, then his conversion will be 100% taxable, as would hers if she has no basis. Note that the Roth IRA is totally separate and has it’s own basis.
Permalink Submitted by Todd Martin on Fri, 2015-03-13 20:23
Let’s say the husband has a TIRA, SEP IRA, and Roth IRA. He has non-deductible TIRA contributions of $5,000 and the balanced of his account is $5,500. His SEP has no basis and has a balanced of $55,000. My understanding is that since he has more than the TIRA (the SEP) if I convert his TIRA to his Roth it will cause a portion of his SEP to now have basis. I not sure exactly how the math works, but if he DID NOT have the SEP or any additional IRAs and I converted his non-deductible balance in full, he would only pay taxes on the $500 gain, correct? However, since the wife had a TIRA with the same non-deductible contributions of $5,000 and the same value, $5,500, and has no other IRAs, if I convert her full balance to her Roth IRA since the IRAs for each spouse stand alone, she can do hers, pay the $500 in taxes on the gains and not effect his TIRA or SEP IRA, correct?
Permalink Submitted by Alan - IRA critic on Fri, 2015-03-13 21:20
Right, with no SEP IRA, the conversion would only have a taxable amount of $500. With the SEP in place that same 5500 conversion would have a taxable amount of 5,046. You are also correct that the wife’s IRA is not affected by his and she converted hers in full the taxable amount would be $500.
Permalink Submitted by Todd Martin on Fri, 2015-03-13 23:14
Thank you for your help as always Alan.