Tax implications of rollovers, other reader questions
Q: In an earlier column, you indicated that if an individual rolled over a 401(k) account to a traditional IRA, if there were after-tax contributions, RMDs would be taxable unless a Roth conversion was done with the aftertax contributions. That does not seem right. Can you clarify?
A: If an individual rolls over a 401(k) with both pre- and post-tax contributions, then when RMDs are required, the owner must file IRS Form 8606 in order to receive a credit for the after-tax contributions. The form would specify the pro rata computations applicable. In order to avoid the pro rata calculation, and the requirement to submit Form 8606, IRA expert Ed Slott’s group recommended that a Roth conversion be executed for the post-tax contributions. In that way, all the subsequent RMDs would be taxable, and there would be no need for filing Form 8606.
Q: My first husband died several years ago. He worked many years under Social Security. I am now 70, and I never applied for survivor benefits. I have remarried. Am I eligible for a survivor benefit based on my first marriage?
A: The answer depends on several factors. First, how old were you when you remarried? If you were younger than 60, you will not be eligible for a survivor benefit based on your first marriage. Even if you were 60 or older when you remarried, there are other factors. Specifically, are you now receiving a Social Security benefit based on your work record or a spousal benefit based on your second marriage? You would be eligible for a survivor benefit only if it is greater than the benefit you are receiving based on your work record or the spousal benefit based on your current marriage.
As long as you did remarry after 60, then you can contact Social Security to determine if you are eligible for a survivor benefit.
Q: I don’t expect to apply for a Social Security benefit until age 70. Will the recent cost-of-living increases be included in my benefit when I retire?
A: Yes. Any cost-of-living increases will be included in your benefit whenever you decide to apply for it.
Q: I have been purchasing individual common stock in one security for several years. I will be selling some of the shares in the near future. How do I determine the basis of the stocks I sell in order to determine the profits I will have to report. What options are available?
A: You should see your tax adviser to determine the best option for you. Your broker should be able to provide you with the cost basis for recent years. Unfortunately, prior to specific dates, you, not the broker, have the responsibility to determine the cost basis.
For common stocks, investors have the responsibility to determine the cost basis before Jan. 20, 2011. For mutual funds, investors have the responsibility before Jan. 1, 2012. For other securities, including bonds, options and other derivatives, investors have the responsibility before Jan. 1, 2014.
According to Bankrate, you have three basic options:
First in, first out, or FIFO. The oldest shares purchased are sold first. This method typically results in larger gains.
Average cost. You calculate this by dividing the total dollars invested by the total number of shares held. This is typically used for mutual funds and shares acquired through dividend reinvestment plans.
Specific identification. You pick specific shares based on your tax situation. You might choose the longest-held or shortest-held shares to sell first.
Bankrate notes: “Unless you choose differently, the IRS default method for stocks, ETFs, bonds, options and other securities is FIFO, so your broker is just following the rules on that one. The default method for mutual funds is average cost.”