Life and Death Planning for Retirement Benefits

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120 Life and Death Planning for Retirement Benefits
Distribution (conversion) Amount: $50,000
Total Nondeductible Contributions: $40,000
Year-end Account Balance: $450,000
Outstanding Rollovers: zero
Return of Basis = $50,000 X [$40,000 ÷ ($450,000 + $50,000)] = $4,000
The amount of gross income Ted must report is therefore $46,000 ($50,000 conversion minus
$4,000 basis allocated to the conversion). His remaining basis in his traditional IRA is $36,000
($40,000 total basis, less $4,000 used up in the conversion).
2.2.09 Partial rollovers and conversions: IRA distributions
This section explains how basis is apportioned in the case of a partial rollover or partial
Roth conversion of an IRA distribution.
A. IRA-to-nonIRA plan rollovers. When a distribution from a traditional IRA is rolled over
to a QRP or 403(b) plan, the rolled-over money is deemed to come entirely out of the
taxable portion of the traditional IRA distribution (applicable to years after
2001). This rule is necessary because the nontaxable portion of an IRA cannot legally be
rolled into a QRP or 403(b) plan. H). See IRS Publication 590 (IRAs) (2009
edition, p. 23).
This exception creates the opportunity for a tax-free distribution from a traditional IRA. In
the Gibbs Example G)), if Gibbs participates in a QRP that accepts rollovers, Gibbs could
take a total distribution of all his IRA balances, then roll over, to the QRP, every dollar above his
$12,000 basis. Now he is left with just $12,000, outside any plan, all after-tax money. He can then
keep this money outside the plan (thus effecting a distribution of his after-tax money while keeping
all pretax money inside a plan), or he can roll the $12,000 into a Roth IRA, thus (apparently; the
IRS has not commented on this technique) effecting a tax-free Roth conversion.
B. Partial IRA to Roth IRA conversion. Generally, any IRA distribution consists
proportionately of pre- and after-tax money, and the same is true for any transfer
(conversion) from a traditional IRA to a Roth IRA. If the participant takes a
distribution from his IRA, and the distribution contains both pretax and after-tax money,
and the participant rolls over (converts) only part of the distribution to a Roth IRA, the
rollover would apparently consist of the same proportions of pre- and after-tax money as
the distribution itself. See Reg. A-1(b), (c), A-7(a) compare
IRS Form 8606 (2009). Unlike with the special rules applicable to partial
rollovers of QRP distributions C)), and to IRA-to-nonIRA plan rollovers (see “A”
above), there is no special exception to applicable to partial IRA-to-IRA (or IRA-to-
Roth IRA) rollovers that would cause the pretax money to be deemed rolled first.
The only possible exception to this conclusion arises if the partial IRA distribution occurs
in a year in which a minimum distribution is required. Reg. A-8, provides that, in the
case of a distribution from a qualified plan, where the distribution includes both pre- and after-tax
money, the after-tax money is applied first to the RMD for the year. This has the effect of making
more of the pretax money eligible for rollover. It is not clear whether this same rule also applies
to IRA distributions.
2.2.10 Exceptions to the cream-in-the-coffee rule for IRAs