ROTH 2010 CONVERSION
I have a client who is retired (62) and will take advantage of the 2010 Roth conversion for his IRA which is currently with me. However, he also has a 401k
(all pre-tax $) that was left with his employer. Given the fact that doing a Roth conversion will require using a pro-rata calculation, my thought was to convert the IRA account to a Roth first, then roll over the 401k to an IRA and later convert to a Roth in the same year. Would that effectively get around needing to apply the pro-rata calculation?
Permalink Submitted by Alan Spross on Thu, 2009-09-03 00:11
Your thinking is correct. Generally, converting the type account with the highest % of basis will get the dollars into a Roth with a lower tax cost per dollar of converted assets. If the 401 k was rolled into any TIRA account, being fully pre tax, it would dilute the basis in the TIRA that already exists.
While the client can also do direct conversions to a Roth IRA from the 401k, doing this would probably delay conversion of some of the TIRA or drive the tax cost of the conversion higher. Of course, a 2010 conversion from either type of retirement account can defer the income equally over the next two years. The tax advantage of converting the TIRA before doing a rollover or direct conversion would of course have to be evaluated against the investment costs and options available in the 401k.
Client should also consider any NUA potential in the 401k before either taking a distribution or rolling it over, since an LSD is required to take full advantage of NUA. If client is able to convert the TIRA and not touch the 401k, then the NUA and direct rollover of the rest of the plan can be considered.
The same thinking applies to married couples, who both have TIRA accounts with different basis %s. The spouse with the highest basis % should be the first to convert, and the spouse’s are also not bound to elect the same deferral option for 2010 conversions. One spouse could report their conversion over two years and the other spouse could report the entire conversion in 2010. That would result in filling the current marginal bracket in all 3 years.