Basis calculation on partial conversion when IRA with basis inherited from spouse was combined with Taxpayer IRA with basis
Client rolled a previous employer’s 401k into a traditional IRA account that had $97,500 basis from nondeductible contributions. In addition, rolled inherited (from spouse) IRA with $87,550 basis into the same account. Now wants to do partial conversion to ROTH. It is my understanding (which may be wrong) that if accounts had been maintained separately, the basis and balance of the inherited IRA would not factor into income recognition, that only the taxpayer’s account balance and its basis would be used. Since combined, are both basis amounts used to determine portion of amount converted that is basis in calculating income recognized? Basis would be allocated using combined basis of TP and deceased spouse accounts as ratio of combined IRA holding TP and deceased spouse amounts.
Permalink Submitted by Alan - IRA critic on Fri, 2021-10-22 17:10
Client has made some rollover errors here. As is, client now has only owned IRAs with a basis of 185,000, so any conversion would pro rate that basis to the adjusted IRA balance. The only way around this would be to roll their pre tax IRA balance into a current 401k or accepting employer plan if they have one. They could then convert all the basis tax free. Further, because of pending tax proposals, this may be the last year this can be done, so should be seriously considered for immediate action if possible since the total basis amount is significant and this might be the last chance to get it into a Roth IRA without a large tax bill.
FYI – what should have been done: 1) A split rollover of the 401k with the basis going directly to the Roth IRA and the rest to a TIRA. 2) Possibly could have taken an inherited IRA distribution and rolled it all to the Roth IRA if basis was a high enough %. Pro rating of the taxes would have only included the inherited IRA since this would have been done before ownership had been assumed.
Yes, as presently exists there is combined TIRA value and combined TIRA basis from all sources which should be shown on line 2 of the next FOrm 8606 to be required.
FYI