1. Correct. The rollover IRA is a traditional IRA and the year end-balance of all traditional IRAs must be included on Form 8606 line 6 when determining the taxable amount of traditional IRA distributions when the IRA owner has basis in nondeductible traditional IRA contributions. Assuming that no after-tax contributions were made to the 401(k), the entire amount rolled over to the IRA was pre-tax and there is no adjustment to be made to basis in nondeductible traditional IRA contributions.
2. Your understanding is correct. Your spouse's Form 8606 needs to be corrected to show the ~$2,700 nonzero year-end balance in traditional IRAs. The amendment must include Form 1040-X because this increases the taxable amount of the 2024 Roth conversion(s). The amount on line 14 of the corrected 2024 Form 8606 carries forward to line 2 of the 2025 Form 8606. The amount on line 14 of the 2025 Form 8606 will carry forward to line 2 of the 2026 Form 8606.
3. Given that the rollover IRA contains a relatively small amount, simply convert the entire balance to Roth. With a zero balance in all traditional IRAs at the end of 2026, all basis in nondeductible traditional IRA contributions will be applied to the 2026 Roth conversions. Given the general desire to increase the balance in the Roth IRA, rolling the pre-tax money in traditional IRAs to the current 401(k) is an unnecessary complication. (Only the traditional IRA balance in excess of basis in nondeductible traditional IRA contributions is permitted to be rolled over to a 401(k). The amount on line 14 of the 2025 Form 8606 represents the amount of basis carried in to 2026.)
