401K conversion to Roth w/o affecting prorata rule on existing IRA?s

Submitted by CD Fewell on Thu, 2016-08-25 02:49

Following termination of employment, is is possible to convert a 401K to a Roth w/o the pro-rata rule requirements relating to an existing IRA? I will be terminating employment in 2017 with my current employer. I would like to convert my $30,000 401K into a Roth. However, I won’t take this step if the pro-rata rule comes into play with my existing $642K IRA.
Thanks for any assistance.



Submitted by Alan - IRA critic on Thu, 2016-08-25 04:08

  1. Your existing IRA accounts are not prorated as long as you do not roll your 401k into a TIRA first. If you do a direct rollover straight to your Roth IRA, your other IRAs are immaterial. However, if you have IRA basis included in the 642k IRA, then you will save taxes by converting 30k of that and rolling a fully pre tax 401k over the following year to your TIRA. In other words, if you want to get 30k into your Roth, convert from the account with the highest basis %.
  2. That said, if you have any after tax balance in the 401k, and still want to roll the entire plan balance to your Roth IRA, you will only be taxed on the pre tax amount. Or if you had an after tax 401k balance and only wished to roll that portion to your Roth IRA tax free, you could.
  3. What is your % of basis in both your TIRA, and your 401k?  If you have no basis in either, there is nothing to pro rate and it would not matter if you converted from your TIRA or from the 401k.

Submitted by CD Fewell on Fri, 2016-08-26 04:43

Thanks for the excellent and detailed answer. This is tremendously helpful. Great news to hear the $642K traditional IRA is immaterial to the current 401K. In 2017 I am retiring so I will convert the $30K 401K into an existing Roth IRA and leave the traditional IRA alone. The $30K is 100% pre-tax. 99% of the $642K traditional IRA consists of pre-tax money (401K rollovers). During low income years 2018-2022 I’ll convert portions of my $642K traditional IRA to a Roth before taking Social Security at age 70.

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