my client has an IRA established in 1993 that is funded over the years (last year was 2010) with non-deductable contributions…He also has a much larger Rollover IRA. ($ for persepctive – non-d 100k / 50k basis — rollover 1M /no basis) The client has converted the non-deductable IRA into a roth…obviously triggering a taxable event. Is it possible to treat the non-decutable basis separately from the other IRA. The 8606 would have me believe that for basis recognition purposes we MUST combine all traditional IRA (roll-overs included) as one and rcognize the bsis proportionatley… this will significantly increase taxes in the current period as he would be forcedto defer recognition to future periods over the withdrawals total IRA.

My client had the understanding that if the non-ductables were issolated in a separate account (“do not cross streams”) he could report the dissolution of the non-duductable account separately. Recognizing 100% of the basis…if consolidated it is less than 10% — big difference in tax.

My quick review of the code did not find were consolidation of IRA values is required… and older 8606’s would have accomodated separate reporting. Also the code sub72 speaks to accounting for contracts separately (seems to be based on annuity thinking…is an IRA a contract?)

I would appreciate it if any of you guys can share a thought or experience that supports separate treatment? (other than recharacterizing and starting over we are preparing an extension.)