Timing of Roth Conversion and 401K Rollover
The situation is as follows:
Traditional IRA funded with after-tax contributions
Old 401(K) plan with former employer funded by pre-tax contributions
Would it be permissible to convert the after-tax IRA to a Roth and subsequently roll over the 401(K) to a new Traditional IRA in the same tax year? My assumption is that the Roth conversion would be done first with the 401(K) rollover following up at a later date. I am just not sure if this would run afoul with the pro-rata rule if done in the same tax year. If so, I suppose the only option is to covert the after-tax IRA and wait to roll over the old 401(K) until the following tax year. The goal is to get all of the after-tax money in the Traditional IRA into the Roth to generate tax free earnings, while minimizing the the tax due on the conversion.
Permalink Submitted by Alan - IRA critic on Tue, 2015-09-15 23:20
Since it is the adjusted year end balance that is reported on the Form 8606, a rollover of the pre tax 401k to the IRA in the same year as a conversion will make the conversion mostly taxable. You are correct that waiting until the following January to do the 401k rollover is the solution. With respect to the IRA conversion you would be doing this year, you must factor in the IRA balance of all your IRAs if you have more than one. Also. your non deductible TIRA contributions may have some gains that will make your conversion partly taxable even with waiting to do the 401k rollover to next year.