Beneficiary IRAs and IRA to Roth Conversions
Have a client who has a Traditional beneficiary IRA and a Roth beneficiary IRA that he is taking annual RMDs on. Also has Traditional IRAs and Roth IRAs in his individual name. If we convert some or all of his Traditional IRAs to his Roth IRAs, do I need to be concerned about creating basis in any of his beneficiary IRA accounts? I know if I don’t convert the full amount of his IRA it will create basis, but was unsure if the beneficiary IRA accounts come to bear on any of these decisions.
Thank you in advance for your help and expertise,
T. C. Martin
Permalink Submitted by Alan - IRA critic on Thu, 2017-12-28 23:53
Any basis in your owned IRAs is completely separate from any basis in inherited IRAs. If there is basis in your owned TIRA and a different basis in your inherited TIRA, you would use a separate 8606 for each. Activity such as contributions, conversions, or distributions in owned IRAs do not in any way affect the inherited IRA accounts. Also, if you convert your TIRA and it has no basis, you still add basis to your Roth IRA because TIRA basis and Roth IRA basis are defined differently. For example, if your TIRA is all pre tax and you convert all or part of it, then the amount of that conversion is added to your Roth IRA conversion basis, even though your TIRA had no basis. Does this client have any basis now in his TIRA account due to having filed Form 8606 anytime in the past? If so, a portion of each conversion will be non taxable and Form 8606 will calculate the breakdown. If this client first contributed to a Roth IRA prior to 2014, his Roth will be fully qualified and tax free on 1/1/2018 (or qualified now if the first contribution was before 2013). Once the Roth is qualified, Roth basis no longer needs to be tracked since all distributions will be tax free.