40b – IRA – conversion and rollover
I am recommending that my client convert three old TSA’s into one large IRA in 2010. There is another IRA in a mutual fund worth $60,000 with $10,000 of non-deductable money. He wants to convert that account to ROTH but keep separate the non-deductable amount. He was told that if he combines the 403b into and IRA this year worth $300,000 that the IRS will consider the whole amount $360,000 convertable and taxes would be due. Is there something about 403b to IRA that I’m missing? The 403b money is going to be completely separate from the IRA account that he wants to convert.
Danny Harlow
Permalink Submitted by Alan Spross on Wed, 2010-04-14 20:09
Basically, what he was told is correct. There are pro rate rules that require all traditional, SEP and SIMPLE IRA accounts to be considered as one large account. Any amount distributed or converted from any of those accounts results in the basis (10k) be applied as a % of the entire balance. In other words, there is no way to keep the non deductible amount separate like he would prefer.
Therefore, the TSA rollovers should be postponed until 2011. Client could then convert the 60,000 IRA this year. 50,000 would be the taxable amount and for 2010 conversions he can report the conversion in 2011 and 2012. Taxable income for 2011 and 2012 each would therefore increase by 25,000. Nothing would be taxable in 2010.
If the TSA rollovers were done prior to next year and 60,000 was converted this year, then the entire balance of 360,000 must be used to calculate the pro rate taxable amount. This works out to only 2.8% of the conversion being tax free and therefore 58,320 would be taxable. Only 1,680 of tax free money gets into the Roth IRA.
It is much more tax efficient to delay the TSA rollovers as this will permit the entire 10,000 of basis to get into the Roth IRA immediately and will eliminate all his basis since he will have a TIRA balance of -0- on 12/31/2010. This will also eliminate the need for filing an 8606 every year distributions including RMDs must be taken from the TIRA and working with a very small tax free percentage.