Custodial transfer to TSP, then Roth conversion
I’m planning a Roth conversion and want to be sure that I understand the situation so as to avoid any mistakes that can’t be corrected before end of year:
– I’m transferring – not rolling over – pre-tax money from my traditional IRA to the TSP. Pre-tax money includes earnings on non-deductible contributions.
– I have several IRA accounts, so the amount transferred from each must be a percentage of the pre-tax total of all the accounts. – The numbers that I’ll use to perform the pro rata calculation are the total nondeductible contributions stated on IRS Form 8606 divided by the current value.
– The after-tax money, the nondeductible contributions, remains in the IRAs. These accounts will then be converted.
– This conversion is not an immediately taxable event. Tax consequences will show up when I begin taking RMDs from the TSP.
Questions:
Have I correctly understood the process?
By the time the conversions have been made, the share prices will have changed somewhat, so the percentages will be different. How will the IRS deal with that?
Permalink Submitted by Alan - IRA critic on Tue, 2021-10-26 16:31
Note that even though a transfer to the TSP is being done, it technically is a direct rollover and will generate a 1099R. You will have to report it on your return with an explanatory statement.
If you have several IRAs, all you have to do is subtract your basis to determine the pre tax value of all, then transfer that total. You do not have to do a transfer from each individual account. The number of transfers depends on how much your total pre tax amount exceeds the balance of any one account. Alternatively, you could do an IRA to IRA transfer(s) first so that you have one large IRA that contains the pre tax total. Then you only have to directly roll that one IRA to the TSP and you will also have fewer accounts to convert. You can do the math to determine which of these two options works best. The fewer direct rollovers done, the easier your tax reporting since you will receive fewer 1099R forms. There are no 1099R form for direct transfers between IRAs (to consolidate the pre tax value into a single account. Your IRA basis is not locked to each current account, it is an amount you documented on Form 8606 that floats over all your accounts.
Be absolutely sure that you do not roll any IRA basis into the TSP. They probably issue warnings about that. If it happens by accident, it is a real mess to correct and worse yet to report.
You do understand the overall process, just not how to best complete the direct rollovers to save work.
If your IRA gains after the rollovers to the TSP, it just means that your Roth conversion will include a small taxable amount. Not a big deal, and you have to report the conversion on Form 8606 anyway. If your remaining IRA loses value before you convert it, your conversion will still be non taxable, but you will have some basis left over. You may or may not lose the benefit of that leftover basis depending how later Forms 8606 are completed. If the remaining basis is high enough that you want to preserve it, then when you do the Roth conversion, leave $100 or so in your TIRA.