Creative Strategy or Doom?

Submitted by Edward Gorski on Tue, 2014-09-16 21:10

Ok here we go. What we know— we can make a contrib to a Non Ded IRA and convert to Roth. We must look at the proportion of curr IRA’s that were deductible to determine the taxes.
We know, if allowed by employer , yoy can roll the IRA to 401k plan to get around the proportion as then it would not be counted if done the same year.

What I dont know is this. Current No IRA. Current 401k = 500k. total After tax amount is 150k. The cost basis of that is 100k, the earnings is 50k.
So, we take the 150k, roll aft tax basis 100k to roth, 50k earnings to Rollover IRA. No taxes anywhere so far. Then make a non ded IRA contrib of 5k, Roll the Rollover IRA 50k back to the plan assuming plan allows and then convert the Non ded IRA to the Roth.
1. ? can it be done ?
2. ? if so , all in the same year?
3 ? if not in same year , can you convert the 5k the folowwing ?

Ed G.



Submitted by Alan - IRA critic on Tue, 2014-09-16 21:58

  • Yes, this can be done and all in the same year. When it comes to pro rating conversions, all that matters is that there is no pre tax IRA balance as of 12/31 of that year. Therefore, the 5k non deductible contribution (recorded on Form 8606) can be converted either before or after the pre tax balance is rolled into an accepting employer plan.
  • With respect to the current 401k, if your plan includes an after sub account (Code Sec 72(d)(2)), the after tax contributions and earnings of the sub account can be distributed to you without pro rating over the entire plan. Doing indirect rollovers (the pre tax portion must be done FIRST to a TIRA) is one of the less risky ways to isolate your basis. You will have 20% withholding of the pre tax amount of the distribution to replace using your other funds in order to make the rollovers complete. The last step is rolling the after tax amount to your Roth IRA. Withholding is recovered when you file or you can reduce other withholding right away to offset the 20%. (20% of 50k or 10k in your example). There are other more risky ways to isolate basis such as having the employer plan do tandem direct rollovers to TIRA and Roth OR just a direct rollover of the pre tax amount and distribute the after tax amount to you which you would then roll to the Roth within 60 days. No withholding in this case because only the post tax amount was distributed to you. Even these methods that are more risky due to conflicts between the tax code and vrs IRS Notices, have not been challenged by the IRS to date.

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