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[[In January, I made a $2000 non-deductible IRA contribution for 1997 and then converted my
entire IRA (approx. $10K) to a Roth. This was the only non-deductible contribution I ever made,
and I treated it as a way of getting an extra year's benefit from the Roth plan without having to pay
any additional tax on the conversion (tax would be due only on $8K).]]

OK...so far so good..

[[ In March I received a rollover from a previous employer's 401(k) of around $90K, and I plan to
leave this as a separate (traditional) IRA account.]]

Uh Oh...I smell a problem here...

[[ Since this happened after the Roth conversion, I
assumed that the tax status of the conversion would not be affected.]]

Oops...I think I see where you're going with this one..

[[ Using last year's tax forms, however, it looks like only the year-end IRA balances are used to
compute basis on withdrawals. I think that means that the tax-free part of the conversion would be
only $200, not the $2000 I had intended it to be. (And the remaining $1800 of basis would stay in
the rollover IRA.)]]

Right...there's the problem.


Under code section 408, the following rules apply to IRA distributions:
1. All IRAs are treated as one contract,
2. All distributions during any tax year are treated as one distribution, and
3. The value of the contract, income on the contract and investment in the contract are computed as of the close of the calendar year in which the tax year begins.

Since all IRA contracts are treated as one IRA, and all IRA distributions during the year are treated as one distribution, an individual can't control the tax consequences of a partial distribution by taking the distribution from a selected IRA. Without this rule, the tax on a distribution from an IRA in which the individual's investment in the contract is a larger portion of the account balance would be less than if the distribution was from an IRA in which the individual's investment was a smaller portion of the account balance. Likewise, I don't believe that you could avoid the "timing" differences by converting an IRA early, and then making a rollover into another IRA.

[[Is it possible to claim that since the conversion was
completed before the rollover took place, that the entire non-deductible $2000 was part of the
conversion?]]

I don't believe so, based upon the IRA rules. Your only hope would have been to hold off on your 401k distribution until after the end of 1998. It's obviously too late for that.

I wish I had better news for you, but this is the law as I read it. I know it doesn't make too much sense, but that's what it says.

TMF Taxes
Roy

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