Basis of asset awarded in divorce

[Kea]

Client's ex-husband was in the military & had an IRA. As part of the divorce settlement client got a portion (maybe all?) of his IRA. Her financial adviser is recommending that she roll that IRA into a Roth because she (financial adviser) is assuming that her basis could be higher than the current FMV. She was saying that in the early 80s members of the military could not open a deductible IRA because of their pension.

Client is now looking through her records to see if she can find out anything about those original contributions, but I'm not sure what's available.

But if the husband did have a basis in the IRA, how would that affect my client's basis if she received it in a divorce settlement? Does she get whatever basis he had or does the value on the date of divorce affect it? Or is there some other calculation / consideration that needs to be made?

Thanks

[OldJack]

Basis after a divorce is the same as before the divorce regardless of who is awarded the asset.

The financial adviser is more likely wrong.

[Kea]

Both statements agree with what I thought. But just wanted to verify.

She's 64 and would get hit with 2 $10K tax bills (2011 & 2012) if the basis is $0. Personally, I think at this point she is better off leaving in the traditional IRA.

It will be interesting to see if anything can come of it being from the military in the early 80s, but I'm not holding my breath.

Thanks OldJack

[jainen]

>>her basis could be higher than the current FMV<<

I don't see how that could be. Although IRA's have always had an income phaseout for taxpayers with a pension, the maximum contribution in the 80s and 90s was only $2000. If she now faces a $20,000 tax bill in the 25% bracket, there must be at least $80,000 in the account. I don't see how it could be that much just based on contributions with a net loss instead of any growth.

[Kea]

I think the adviser was trying to count any reinvestment up until the divorce. She did not know (and she admitted it) if she could count the value on the date of divorce. Even if the Roth rollover doesn't make sense this a good time to start trying to determine if there is a basis. It's already going to be difficult, but it will just get harder to get the info over the next few years.

Thanks for all your help.

[OldJack]

Its not likely there is any tax basis for an IRA unless the taxpayer filed form 8606 (attached to 1040) to establish non deductible contributions.