Mixed After and Before Tax IRA Roth Conversion

Submitted by Samuel Taylor on Thu, 2018-05-10 13:38

I have a new 58 yo high-income client that is planning for a retirement at 60 or 61. He has two existing IRA’s at two separate custodians that total $118k. He files his taxes through Turbo Tax which shows a Form 8606 with a basis of $87k. We are trying to dispose of these IRA’s prior to his retirement when he will rollover a +$1m 401k. The thought is we don’t want to dilute the after-tax pro rata share of the existing IRAs. The two options we are exploring are (a) wait till he reaches 59 1/2 and then take the distribution as income for his future retirement needs (b) convert the IRA’s to Roth IRA’s. This is where I could use some assistance. What would the steps be to make the conversations and how would this be taxed? Also, we were planning on consolidating these IRA’s. Would it muddy the waters if we consolidated the accounts prior to doing the conversion?

Thanks for any input.



Submitted by Alan - IRA critic on Thu, 2018-05-10 15:25

  • Consolidation of IRA accounts will not affect the taxable amount of a conversion. But the most tax efficient action would be to have client roll his pre tax IRA balance into the 401k plan, leaving only the basis of 87k in his TIRAs. Right after this is done, he can convert the 87k to his Roth IRA tax free. After retirement, he can roll the entire 401k balance back into his TIRA if he chooses. Or in many plans he could roll the amount rolled into the 401k back out next January since the 87k will presumably have been converted this year. Since his basis will have been eliminated, he will also escape having to file Form 8606 every year he takes a TIRA distribution including RMDs for the rest of his life. Finally, not having a TIRA balance for the next couple of years would enable him to do a back door Roth contribution should he choose (make ND contribution and convert it tax free to Roth).
  • The first step then would be to determine if his 401k plan accepts IRA rollovers from IRA accounts that are not rollover IRAs. If so, proceed with the IRA rollovers of ONLY his total TIRA pre tax balance. Second step, convert the 87k to a Roth.
  • Now if his plan will not accept his TIRA rollover, Plan B would be converting to a Roth IRA and paying taxes on the pre tax portion of each conversion. That amount depends on his total TIRA values, which I assume is more than 118k. The higher the total value, the higher his taxable portion will be and he might even be better off to wait until he retires before converting, complete the conversions, and in the following year roll over the 401k. As you know, once the 401k is rolled over to his TIRA, the taxable portion of any conversions will spike.

Add new comment

Log in or register to post comments