Pre Tax 401(k) to ROTH after being in Rollover IRA
If an individual rolled over after tax funds prior to the law change allowing direct rollover to ROTH and has kept basis info. Can they convert only the after tax portion in 2009 as they are now below the income threshold?
Permalink Submitted by Alan Spross on Fri, 2008-11-28 21:32
No, once after tax funds are rolled into a traditional IRA account, Form 8606 must be filed to report the added basis to the IRA. Conversions are subject to the pro rate rules resulting in conversions being partially tax free to the extent of the portion of basis relative to total year end TIRA market value.
Those holding after tax contributions in their qualified plan should consider first doing a direct rollover of the pre tax amount to a TIRA, and then converting the remaining after tax balance directly to a Roth IRA tax free. The income limits for conversion apply until 2010, meaning that those with considerable after tax balances may wish to postpone the rollovers for another 13 months.
Permalink Submitted by Jeffrey Smith on Fri, 2008-11-28 21:40
what is a TIRA?
Permalink Submitted by Al Fry on Fri, 2008-11-28 21:42
Point made. TIRA = Traditional IRA.
Permalink Submitted by Jeffrey Smith on Fri, 2008-11-28 21:52
If the pre tax has been kept separate from the pre tax in a different IRA must it still be pro rata? I would imagine it would.
Permalink Submitted by Jeffrey Smith on Fri, 2008-11-28 21:57
Correction: if the post and pre have been kept separate.
Thanks
Permalink Submitted by Al Fry on Fri, 2008-11-28 22:03
Yes. From an IRS standpoint, an individual only has one TIRA, regardless of how many separate TIRAs one might have.
Permalink Submitted by JAMES MAGNO on Fri, 2008-11-28 22:38
Most employer plans will only allow rollovers of previously tax income. Therefore, a good strategy would be to roll over Traditional IRA assets into an employer plan except the nondeductible portion. I think the determining factor is the employer plan document – what does it say? If it only allows pre tax dollars, then rollover that portion and you will be left with after tax dollars which can then be subequently converted to a ROTH. I think that the conversion must be done in the following year otherwise the math does not work out. Comments? I believe that I am on the right track, but willing to stand corrected.
Jim
Permalink Submitted by Alan Spross on Fri, 2008-11-28 23:04
Jim,
Basically correct.
However, no qualified plan can accept after tax IRA dollars per IRS requirement, so the plan document is immaterial with respect to that particular issue. Of course, the plan does have the authority to not accept ANY incoming IRA rollovers. A qualified plan CAN accept incoming after tax dollars from another employer plan if they are willing and able to track those after tax amounts, but never from an IRA.
If a plan does accept the pre tax IRA dollars, leaving only the non deductible basis in the IRA, a conversion can be done without waiting until the following year. The year end fair market value determines the pro rated taxable portion of the conversion per Form 8606, so if the employer plan will accept the pre tax amount, the only earnings left in the account will be those earned after the transfer to the employer plan, and the conversion will be very close to fully tax free if done shortly after the IRA transfer.