IRA how to rollover to 401k and backdoor Roth

Submitted by James Lee on Tue, 2017-11-14 22:11

I am currently married and contributed to my traditional IRA as follows:

2015: $5,500 deductible
2016: $5,500 non-deductible
2017: $5,500 likely non-deductible

So I have a $5,500 basis from my 2016 taxes in my IRA (as reported on form 8606).

The other issue is that all the money is in a single traditional IRA as a mix of deductible and non-deductible money plus this year’s contribution. I contributed to the IRA earlier in 2017 without thinking it through, and I expect that it will be non-deductible this year again. I also have the IRA totally invested in an index fund, and let’s say that it lost some money and the IRA is now valued at $15,000.

I have a 401k that accepts IRA rollovers so I would be interested in moving my deductible pre-tax IRA portion so that I can then perform a clean backdoor Roth with my 2017 contribution without paying pro rata taxes (and in future years also). What is the best way to do all of this please? I was not sure how to deal with the IRA $5,500 basis that exists, amounts to transfer since the IRA has lost money, and to make sure that there would be no tax consequences in the 401k rollover or the backdoor Roth.

How do I calculate how much money to rollover from the ~$15,000 IRA to 401k? Since I can only rollover the deductible pre-tax portion (corresponding to the 2015 contribution), I was not sure how to calculate that portion exactly.

Can I do a backdoor Roth of $11,000 (5,500*2) this year since that includes the contributions amount of 2016 (assuming the basis ensures there is no tax?) and 2017, and rollover the remaining ~$4,000 (15,000-11,000) to the 401k?

I imagine I should do the 401k rollover and backdoor Roth in 2017, but what is the order I should do things? Is it better to sell assets to have them as cash for doing any of these transfers with exact amounts?

Thanks so much!



Submitted by Alan - IRA critic on Tue, 2017-11-14 23:55

  • You would plan on not deducting your 2017 contribution. Your basis would then by 11,000. and you would keep 11,000 in your TIRA and roll over the balance of the account to the 401k. But since that amount is apparently only 4,000, you probably should just convert the entire account balance, not do the rollover, and pay taxes on the 4,000. But you certainly can roll over the 4,000 or whatever the pre tax value actually is if you want to. You can do the conversion right now of the full balance if you decide not to bother with the rollover, otherwise I would start the rollover process immediately (some plans will not accept IRA rollovers at all, or only rollovers from rollover IRAs that came from a former employer plan). Once you complete the rollover, you can then convert the 11,000 this year. Your conversion will be non taxable. If you do not want to report the conversion on Form 8606 on your 2017 return, you could wait until January, add your 2018 non deductible contribution to the account and then convert the entire balance in January. 
  • Remember to report any non deductible contributions on Form 8606 for the tax year. You will also report any conversions on Form 8606 for the tax year in which you convert.
  • These answers assume that you only have this one non Roth IRA.

Submitted by James Lee on Thu, 2017-11-16 14:55

Thank you for your reply, I appreciate it. I would like to do the rollover and backdoor Roth all during this year. So to make sure I do this correctly to avoid any tax consequences, I should do the following in this order:- Keep $11,000 cash in the TIRA (this is to include the $5,500 basis from last year’s non-deductible portion, and the $5,500 contribution from this year that is also non-deductible and would be added to the basis).- Rollover the remaining amount, ~$4,000, from the TIRA to the 401k. I will just make sure to keep the above $11,000 in the TIRA, and everything else can rollover.- Do a backdoor Roth conversion of $11,000 from the TIRA. So at the end of the year, I will have ~$4,000 in a 401k, $11,000 in a Roth IRA, and $0 in a TIRA. And my IRA basis will become $0.  No taxes would be paid during the rollover or backdoor conversion. Then next year, I can contribute to my TIRA the max annual contribution. If that amount is non-deductible, then it becomes my new basis and I can just do the backdoor Roth conversion cleanly of that amount. There would be no taxes paid for this conversion either. Do I understand correctly please to make sure that things are done right and there would be no tax consequences of any of the transfers I am planning to make?

Submitted by Alan - IRA critic on Thu, 2017-11-16 17:02

  • Yes, that plan is fine. I would get started on the 401k rollover right away, since that can take time. As soon as you know the plan accepted the 4000, convert the 11000. Note that in the days it takes to complete the rollover, the 11000 could gain a few bucks, and you would then convert the total balance. Any gain would be taxable but might be so small that it will not even increase your tax bill.
  • The other alternative is to convert your basis of 11000 now and at the same time start the rollover process. That will reduce gains before you convert, BUT the pitfall is if your plan does not accept the rollover for whatever reason (some plans accept IRA money from rollover IRAs only and you have a contributary IRA account), your conversion would be be partially taxable and to eliminate any tax you would have to recharacterize the conversion. Therefore, if you are not positive that your plan will accept your pre tax IRA balance it is safer to complete the rollover to the 401k before converting.

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