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Incorrect cost basis after Roth conversion

HokieDon

Transferred a security from IRA to Roth by
- entering a SELL transaction in the IRA
- transferred the cash to taxable brokerage account ( so Q will properly record distribution )
- transferred the cash from the taxable account to the Roth
- purchased the security in the Roth.

Unfortunately, my cost basis for the security is now incorrect. I have verified the correct CB by entering all transactions into a spreadsheet and by reviewing brokerage CB.

It appears from Quicken's Security Report, that Q broke out the Realized Gain from the SELL transaction and this resulted in the "Amount Invested" column to be incorrect and this column appears to be what is used to calculate the cost basis.

If the entire SELL had been entered into the Amount invested column, the Quicken CB would agree with my spreadsheet and the brokerage.

Is there a way to transfer shares from IRA to Roth that both records the distribution correctly and maintains the correct cost basis?

Is there a way to correct the Cost Basis?

Why does Q record realized gain in an IRA?

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Comments

Jim_Harman

It sounds like you recorded this transaction correctly. What do you think the new cost basis should be?

Cost basis is used to calculate capital gains and losses for tax purposes and thus is generally not important in a tax deferred account. When you sell a security in a taxable account, you owe tax or get credit on the capital gain or loss at the time of the sale, but this does not apply to a tax deferred account. If you buy the security back, either in the same account or a different one, the cost basis is reset to the new purchase price.

With a Roth conversion, you are taxed on the full value of the transfer as income and not as a capital gain.

Note that Amount Invested is not the same as Cost Basis. It is useful mainly as a component of other investment calculations such as ROI.

If you want to measure investment performance over a period that includes the transfer, you should include both accounts and use the Investment Performance report or the Avg Annual Return (%) columns in an Investing Portfolio view. These do an IRR calculation, which does not use the cost basis.

If in real life the shares were transferred in kind, i.e. without selling and buying, you can use Quicken's Shares Transferred Between Accounts to record the transfer and preserve the original cost basis, but then Quicken will not capture the value and tax implications of the Roth conversion.

If you would like Quicken to make improvements in this area, please review, comment and vote on this Idea post.

https://community.quicken.com/discussion/7864626/improve-handling-of-ira-distributions-including-qcds-and-roth-conversions

HokieDon

Follow-up
Quicken also is reporting an incorrect amount in the Income column.

If I set the "As Of:" date back to the day before the transactions, the CB and income are correct.

Jim_Harman

I assume this is an Investing > Portfolio view.

What do you think is incorrect about the Income column?

What does it show before the transactions? What does it show after?

To answer the last question in your first post, gains are realized when you sell a security in an IRA just like any other account, but they are not taxed.

The default settings for Quicken's Tax reports handle this by excluding tax deferred accounts.

HokieDon

Interest Income should be 3286. After the conversion Interest income is reported as 991. Why would income disappear?

I understand that gains are realized, so a new cost basis is established in the Roth, and that (unrealized) Gain/Loss will change based on current price versus average cost.

Jim_Harman

Usually the Unrealized gain/loss depends on the current market value and the total cost basis of the tax lots you hold. This may be different from current price vs average cost if you have made partial sales.

Where are you viewing the Interest income? Is it the Income column in a Portfolio view, or something else?

Did the transfer sell all the shares in the IRA? If so, that holding and its income will no longer be included in the Portfolio view calculations after the transfer date.

HokieDon

Sold all, so that explains that. Total is available in the Income by Security report.

Thanks

Jim_Harman

BTW if you want to continue to see the income from the transferred security in the Portfolio views after the security was sold or transferred out, you can click on the gear at the top right of the view and select Show closed lots.

q_lurker

I don’t have time to confirm this right now, but I don’t think there is a closed-lot issue per-se with the income presentation.

Let’s say you sell all shares from account A and then buy shares in account B and have dividends in both accounts from those shares. You then look at a portfolio view with the income column. Say that view includes accounts A and B.

That view grouped by account will not show that fund’s income within account A unless you choose the show closed lots option. The income within account B for that fund will show under account B.

But if you group by security, I would expect the income for that fund to include income accrued under both accounts, even that associated with the closed lots, regardless of the show closed lot setting.

Further notes - that income does not include realized gains. That income column is also subject to the starting date specified via Options / Portfolio preferences.