Isolating Basis – Does the order matter?
Hello,
A client had $68k of basis in his IRA which he first converted to a Roth IRA in 2023 and subsequently (same year) rolled the pre-tax money to his 401(k). His CPA is telling him that the pro rata rule will apply because he did the conversion first. Is that right, or will the conversion be tax feee because he had a $0 balance in his IRA on 12/31/2023.
Thank you!
Permalink Submitted by Alan - IRA critic on Thu, 2024-04-11 15:19
The CPA is incorrect. There is a special rule that rollovers from IRAs to employer plans are treated as coming first from pre tax amounts, the Form 8606 instructions are designed to base the tax on distributions in the same year on the year end balance of the IRAs, not on the balance as of the date of the distribution (conversion). The conversion here is tax free.
Despite that, it is recommended that the rollover to the 401k be done first to provide protection for the taxpayer in case the plan does not accept the IRA rollover.
Permalink Submitted by Sarah Murphy on Thu, 2024-04-11 17:39
Thank you, Alan. I thought the calculation was based on the year-end balance, but his CPA thought otherwise. As usual, I really appreciate your input.