Roth Conversion - how to NOT identify shares?

Question

I did an in-kind Vanguard-to-Vanguard Trad-to-Roth IRA conversion yesterday.  My download received ONLY a "Removed" transaction, from the trad IRA.  I was going to manually enter a transaction with type = "Shares transferred between accounts" and hope that the tax schedule settings on the accounts correctly record my distribution for tax estimating.

However, when I start that transaction, I'm asked to identify *which* shares are being transferred:  first in, lot ID, or all.  It's a partial conversion, so I can't use all.  My understanding is that, in IRA accounts, you don't really identify shares sold (at least, not at Vanguard), as all distributions are just ordinary income and basis doesn't come into play.

I know that I can change the cost basis method by security - but I hold the same security in my IRAs as in my taxable account, where I want to use Specific ID.

What do I do?  Just use "first in," and not worry about which shares are ACTUALLY being transferred?

Jim_Harman · Answer

These are good questions.

First of all, tracking cost basis and tax lots is not really important for tax deferred accounts, because you are not taxed on any capital gains.

In Quicken, as long as you have not chosen Use average cost on a security level, you can select which lots to sell or remove each time you sell or transfer a security, so you can treat each account and sale differently.

To record the conversion in Quicken accurately, I have heard that is is best to "Sell" the security in the traditional account on the transfer date. Then in the Roth account, enter a Deposit for the gross amount, using the traditional account as the Category. If taxes were withheld, record them as a split in the Deposit. Then "buy" the security in the Roth account.

See this recent discussion for more info
https://community.quicken.com/discussion/7902962/how-should-transfers-of-securities-from-a-401k-rollover-ira-to-a-roth-ira-be-recorded

Sherlock · Answer

If you're converting the entire traditional IRA account to the Roth account, choose All securities.
If you're only converting all of one security from the traditional IRA account to the Roth account, choose All.
If you're only converting a partial holding of one security from the traditional IRA account to the Roth account, choose either First shares in or Lot identification.

It doesn't matter which you choose because these are tax deferred accounts.  You will pay a tax on the total value of the amount converted and there should be no tax due when you withdraw from the Roth.  The cost basis in these holdings is only useful for tracking the performance of the investment in the security.