splitting funds to process backdoor ROTH
Client has 150K+ in IRA with around another 25K in non-deductible contributions in the same account He was advised to send the 150K back to the 457b from which it came then convert the non-deductible portion to a ROTH to avoid pro-rata. Two questions, why back to 457b, if it can be separated, then why not just move to another IRA? Second, if he does this, what about the earnings on the non-deductible portion, with that be the only portion taxed during the conversion to a ROTH?
Permalink Submitted by Alan - IRA critic on Fri, 2021-11-19 23:01
To convert IRA basis tax free, the pre tax balance must be rolled into an accepting employer plan, not to another IRA. Only the basis amount reported on Form 8606 should be left in the IRA to convert. Earnings on the non deductible contributions are pre tax money and should be included in the rollover to the accepting employer non IRA plan. If the 457 will only accept the funds rolled out of that plan, then any gains on the non deductible contributions would be taxed if the remaining IRA balance was converted.
Permalink Submitted by Toby Hartley on Mon, 2021-11-22 18:02
Thanks. Just found out though that the 150K of pre-tax was not from a plan but rather just IRA contributions over the years. Can he still move these and the gains on the non-deductible to a 457b plan that he does have? Assuming they will accept of course?
Permalink Submitted by Alan - IRA critic on Mon, 2021-11-22 18:29
Yes, any pre tax IRA amounts can be rolled into the 457b if the plan accepts these rollovers. But it is worthwhile to note that while a 457b balance can be distributed without any 10% penalty, that penalty free balance does not include amounts rolled into the plan from an IRA. Therefore, if a 457b distribution is taken, in addition to taxes due, there will be a 10% penalty on the portion that came from an IRA, but no penalty on the portion that was contributed directly to the 457b.
Permalink Submitted by Toby Hartley on Tue, 2021-11-23 00:09
Thanks. That is helpful. One person he spoke with was highlighting the 457 and the pre 59 1/2 issue as one of the reasons to make the move.