Withdrawing Non-deductible Basis
A working 65 year old (contributing to his 401k) has a $500k traditional IRA, of which $50k is after-tax. He doesn’t want to deal with eventual pro rata calculations. Do the following steps sound correct: 1) transfer $450k to his existing 401k (as long as the custodian allows it), and make sure the $450k is in the 401k before proceeding to step 2. 2) distribute $50k from the TIRA (making sure the form 8606s have been filed for each of the non-deductible contribution years). 3) if the person wants to move assets back to the TIRA (and the 401k allows), complete an in-service rollover to the TIRA. If these steps are correct, can they all be done in the same calendar year, as long as the steps are followed exactly?
Thank you
Permalink Submitted by Alan - IRA critic on Mon, 2021-01-11 21:14
I would think that he would be better off just converting the 50k to a Roth IRA, unless he needs the funds for current expenses. Both conversions and distributions would be tax free if they are limited to the IRA basis left behind after the rollover to the 401k. Even if he will need the funds in a couple years, he could take a distribution out of the Roth IRA of at least 50,000 with no tax or penalty anytime he needs it.
He needs to know exactly what his IRA basis is before rolling to the 401k. He does not have to have filed all the 8606 forms before doing the rollover, but he will need to file them within a few months anyway, so it is advisable that he files any missing 8606 forms before rolling to the 401k.
He cannot roll the 401k money back into the TIRA until the year after he converts or distributes the IRA basis. That means 2022 before he could roll it back to the TIRA without making his distribution in 2021 90% taxable.
Permalink Submitted by John Boyle on Tue, 2021-01-12 00:12
Good point on the Roth. That last bullet point is the answer I needed. Thank you once again Alan.