2010 Roth Conversion: Pro Rata and Employer Sponsored Plan
My TIRA balance is approximately 80% non-deductible money. The non-deductible money has been documented each year by filing form 8606. I plan to convert the TIRA to a Roth IRA in 2010 by using the following sequence:
1. Make full 2010 IRA contribution to TIRA (Income restrictions will not allow for a Roth contribution and I will document this contribution with form 8606).
2. After 2010 contribution has been made to TIRA, convert entire balance to Roth IRA (taxes will be paid on deductible portion with outside monies).
3. Sometime after tax year 2010, roll over 401(k) plan that still resides with previous employer to TIRA and Roth IRA (the 401(k) plan has a pretax source and a Roth source and there is money in each source).
Questions:
1. Do you see any possible pitfalls to the strategy outlined above?
2. As long as I leave the 401(k) with the previous employer, I do not have to account for that balance in my pro-rata calculation for the Roth conversion. Is that correct?
3. The TIRA I refer to above does have some rollover money from a previous 401(k). Does that have any impact on the 2010 Roth conversion?
Thanks.
Permalink Submitted by Alan Spross on Tue, 2010-01-05 23:30
1. The mechanics are sound. In addition, your basis % is so high that it removes most of the doubt as to whether you should convert or not. You will also have to decide whether to defer the conversion income to 2011 and 2012 or opt out and report it all in 2010.
2. Correct. 401k after tax contributions are not shown on the 8606 unless they are rolled into a TIRA. You said the 401k had a “Roth source” which I took to mean a designated Roth account (aka Roth 401k). But if the after tax amount is from non Roth after tax contributions that you want to convert, then you need to monitor IRA clarification of whether you can separate the pre tax amount to the TIRA and the post tax amount to the Roth IRA WITHOUT doing in indirect rollover. Here the concern is the pro rata rules within the 401k itself. These can be avoided with an indirect rollover and conversion but then you are faced with 20% withholding on the pre tax amount. The IRS needs to rule on this very soon.
3. No impact other than the pre tax amount will be taxable in a conversion and subject to the 2 year deferral unless you opt out.