Underwater IRA + Deductible IRA => 401k + Roth IRA
Taxpayer has an After-Tax IRA with $20K balance and $39K cost basis (reported on Form 8606), and also a Pre-Tax Conduit IRA with $200K balance (no basis). Also has a traditional 401k through active employment.
I believe it is possible to roll over $39K to Roth IRA and remaining $181K to 401k, all without tax or penalty.
But what are the precise steps needed to accomplish this? e.g. Does this work: get a $181K distribution check from the large IRA and send it to the 401k trustee, then do a trustee rollover of the remaining $20K and $19K to a new Roth IRA? Does the sequence matter? Are there any pitfalls?
Thanks
Permalink Submitted by Alan Spross on Thu, 2012-03-22 23:21
You are correct, as long as the employer plan will accept an IRA rollover. Some do not, and some will only accept IRA rollovers from “rollover or conduit IRAs”. In this case, the goal is to get the plan to accept 181k. If this plan will only accept rollover IRA accounts, then I would directly transfer 19k to the contributary IRA, leaving a rollover IRA of 181k, the correct amount to roll to the plan.
The plan should be contacted with respect to the paperwork required to complete the rollover. Many plans want a check made out to the plan, FBO the employee, and that check can be forwarded through the employee to the plan if the IRA custodian will not mail it directly.
The sequence does not matter between the rollover and the Roth conversion, but since more problems and snags occur with the rollover to the plan, it is usually better to complete that first and the minute the employee knows the rollover was accepted, the convert the remaining basis.
If the conversion is done first, and the rollover fails then the employee may end up recharacterizing the conversion to eliminate the tax bill.