2010 IRA conversion with 401k Rollover of Taxable amount?
Say someone has $200,000 in an IRA with an after-tax cost basis of $20,000. The year is 2010. Tax Facts says one cannot roll over after-tax IRA contributions into a 401k. Therefore, the client rolls over $180,000 of pre-tax IRA funds to thier 401k.
Can the client then convert the remaining $20,000 that is in the IRA to a Roth IRA?
Permalink Submitted by Denise Appleby on Mon, 2008-02-18 22:41
Yes.
Of course, the [url=http://retirementdictionary.com/401-l-plan.htm%5D401(k)[/url] would need to permit the rollover. Not all of them permit rollovers , and some that do limit the source from which the rollover can be made.
Permalink Submitted by [email protected] on Tue, 2008-02-19 14:12
Therefore, if this is correct, one has a zero tax planning opportunity for people who do not qualify for Roth IRAs.
Contribute as much as possible to a non-deductible IRA.
Transfer all of the taxable portion to a 401(k) (assuming one is available which allows transfers in from IRAs).
Convert the non-taxable contribution tax free to a Roth IRA. Since all earnings are transferred to the 401k, only after-tax dollars remain in the IRA to be converted.
Permalink Submitted by Alan Spross on Tue, 2008-02-19 17:43
Right. You can increase the chance of your plan accepting an incoming IRA rollover somewhat by keeping former QRP rollovers in separate IRA accounts. Some plans will only accept those “conduit” IRA accounts for rollover, feeling that there is less chance for them to inadvertantly acquire after tax contributions, which could disqualify their plan.
Technically, their impression is incorrect, a throwback to pre EGTRRA (2001 tax legislation) days when after tax contributions could not be rolled over, portability was limited, and most people did not commingle rollover IRAs with contributary ones. While the plans no longer have this protection, some persist in feeling this requirement still lessens their risk. For taxpayers, there is no tax disadvantage for commingling anymore in almost all cases, but there remain some portability and credit protection disadvantages.
Permalink Submitted by David J Chapman, CFP on Tue, 2008-02-19 18:01
I have a client who had an IRA (25k) with a cost basis of 13k – he rolled that into his company 401k planand is now taking RMDs. I do not believe that the current custodian has any idea that there is any cost basis in the funds. They sent him his first RMD last year. I believe that only a part of that RMD is taxable – am I correct – and if so how do I report what is and what is not taxable oon 2007 tax return? Also do I have to file an updated 8606 form if in fact some of the RMD is non taxable?
Permalink Submitted by Alan Spross on Tue, 2008-02-19 18:40
If that’s his only IRA and the plan took the entire 25k, there is a major problem, because the solution is now out of his control. I assume you mean that the RMD is being issued by the 401k plan. Obviously, the plan has no idea and considers these funds pre tax and that will be reflected on his fully taxable 1099R, meaning that he has lost his basis. Form 8606 applies only to IRA accounts. If he has other IRA accounts, then the funds rolled over are considered to first exhaust the pre tax amounts.
But if not and the plan discovers the problem, they will have to address it with a recommended plan corrective measure or face the possibility of disqualification of the plan. How this action will affect the client depends on which measure is used and when. If he brings this to the attention of the plan now, I cannot tell you how they will react and what would occur as a result, or how the IRS involvement will play out if he brings this to their attention on his tax return. Perhaps someone more familiar with EPCRS corrective procedures could shed more light on what plan action could be expected.