401K in-plan conversion and how it impacts eligibility to contribute to ROTH IRA
Hi,
I have a questions I am hoping someone can answer for me.
I did a 401K In-plan Roth conversion. There is a Nontaxable part and a taxable part. The non taxable part is from after tax contributions made to the 401K and the taxable part is from earnings on the after tax contributions. Do I have to count the after tax contributions as well as the after tax earning part of the conversion toward the less than 198,000 earnings limit for ROTH IRA contributions this year? or is it just the taxable part (the earnings part of the conversion) that would count and I would not count the after tax (contributions) part since taxes were already paid?
I think the answer is that only the taxable part would count toward the income limits for ROTH IRA contributions but I am not sure and wanted to get some others input.
Thanks.
Permalink Submitted by Alan - IRA critic on Tue, 2021-10-05 14:49
You are correct. The in plan Roth rollover of earnings (the taxable portion of the IRR) is included in your MAGI for regular Roth IRA contribution purposes, but not the non taxable portion of the IRR. This is illustrated on line 2 of Worksheet 2-1 on p 39 of Pub 590 A.
Permalink Submitted by Steven Vitullo on Tue, 2021-10-05 16:23
So does line 2 of Worksheet 2-1 on p 39 of Pub 590 A apply to 401K Roth Conversions, 403B Roth Conversions, and Traditional to Roth IRA Conversions? Becasue the worksheets seems to only talk about IRA and ROTH IRA with no mention of 403B or 401K. Thanks.
Permalink Submitted by Alan - IRA critic on Tue, 2021-10-05 17:25
Right, the worksheets exempt conversions and rollovers to Roth IRAs from MAGI, since they are subtracted from AGI on line 3 of the worksheet. However, the taxable portion of in plan Roth rollovers (IRRs) are not mentioned in line 2 and are therefore included in MAGI to the extent of the taxable portion of the IRR.
Per the above, if you rolled your after tax sub account with it’s earnings directly to your Roth IRA, your MAGI for Roth contribution purposes would not be increased, while doing an IRR within the plan would be added to AGI. This varying treatment can result in a benefit from moving the funds to your Roth IRA if your plan provides an option for the destination account.