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Chapter 2: Income Tax Issues
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any such account is counted as part of the Distribution Amount.
§ 72(e)(2)(B) , (5)(A) , (5)(D)(iii) ,and
(8)(B) .However:
Inherited
IRAs held as beneficiary are aggregated only with other inherited IRAs
held as beneficiary of the same decedent; they are
not
aggregated with the
individual’s own IRAs; see
¶ 2.2.07 .
Roth IRAs
are not aggregated with
traditional IRAs
.
§ 408A(d)(4)(A) .
IRAs of
husband and wife
are not aggregated. Each spouse’s IRAs are aggregated
only with other IRAs belonging to that spouse. See Notice 87-16, Part III, D7, and
Instructions for IRS Form 8606 (2009), “Specific Instructions,” first paragraph
(page 5), stating that Form 8606 is completed separately for each spouse.
G.
Cream-in-the-coffee formula: Examples.
The following “Gibbs” and “Ted” examples
illustrate the formula:
Gibbs Example:
Gibbs has $12,000 of nondeductible contributions in his traditional IRA at X
Fund, which is now worth $30,000. He also has a traditional IRA worth $210,000 (as of the end
of Year 1) at Y Fund. The larger IRA received no after-tax contributions; it contains only a rollover
from a QRP maintained by Gibbs’s former employer, plus some deductible IRA contributions
Gibbs made prior to 1987. He has no other IRAs. In Year 1, he cashes out the $30,000 IRA. He
thinks that, because that particular account contains his $12,000 of after-tax contributions, he will
be taxable on only $30,000 - $12,000, or $18,000. However, because of
§ 408(d)(2) ,Gibbs’s
$30,000 distribution is
deemed
to come proportionately from
both
of his IRAs, even though it
actually
came from only one of them. Here is how the cream-in-the-coffee fraction applies to
Gibbs’s distribution:
Distribution Amount: $30,000
Total Nondeductible Contributions: $12,000
Year-end Account Balance: $210,000
Outstanding Rollovers: zero
Return of Basis = $30,000 X [$12,000 ÷ ($210,000 + $30,000)] = $1,500
The amount of gross income Gibbs must report is therefore $28,500 ($30,000 distribution minus
$1,500 basis allocated to the distribution). His remaining basis in his traditional IRA is $10,500
($12,000 total basis, less $1,500 used up in the Year 1 distribution).
Ted Example:
As of August 1, 2010, when he converts the entire account to a Roth IRA, Ted has
$50,000 in his traditional IRA, $40,000 of which is after tax money. He never recharacterizes this
conversion. On December 1, 2010, he retires from his job, and gets a distribution of $450,000 from
his 401(k) plan, all of which is pretax money. He rolls the $450,000 into a traditional IRA on
December 2, 2010. He makes no other contributions to (and receives no other distributions from)
any traditional IRA in 2010. Ted
thinks
that he has made a Roth conversion that is only 20 percent
($10,000 ÷ $50,000) taxable, but his post-conversion rollover messes up the fraction. Here is how
the cream-in-the-coffee fraction applies to Ted’s Roth IRA conversion: