1

I just converted some money in a SEP-IRA to a Roth IRA. The value of the fund that money was invested in was down about 10% from when I initially invested in the SEP-IRA. Once the transaction was completed, I was surprised to see my account custodian listing the Roth IRA cost basis as the original investment amount into the SEP-IRA, rather the value of the fund at conversion (again, about 10% less than the original investment amount).

  • Why is the cost basis of the Roth based on the original SEP-IRA investment amount rather than the value of the investment at conversion?
  • Does the value of the cost basis affect the taxes of the conversion at all? Or are the taxes based solely on the value of the investment at the time of the conversion?
1

There are two different ways a broker can transfer accounts:

  1. Liquidate (sell) all investments, transfer the cash, and then purchase them again.
  2. Have your broker actually transfer the assets themselves. Nothing is sold, just the account that owns the securities is changed.

Number 1 would change the cost basis from the original, since you are selling and then re-buying the securities. Number 2 would not generate capital gains/losses, since nothing is sold.

In this case number 2 is what happened with your conversion. This is easy to do if your old and new account are at the same broker, but it is possible with inter-broker transfers.

Does the value of the cost basis affect the taxes of the conversion at all?

Cost basis only comes in to play when calculating capital gains/losses. So cost basis would only matter in situation number 1. Even if the assets were liquidated, the taxes would most likely be figured when you do your taxes the following Spring. In contrast, brokers will often automatically withhold taxes due from a conversion.

Or are the taxes based solely on the value of the investment at the time of the conversion?

Taxes on the conversion are based on the value of the investment at the time of conversion, cost basis doesn't matter. In other words, any taxes on capital gains/losses is a separate "transaction" from the taxes due on the conversion.

| improve this answer | |

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.