Non-deductible 401k in-service Roth Conversion
Normally when you have a 401k in-service Roth conversion, tax is due at ordinary rates on any earnings which are in excess of the non-deductible contribution basis. Question – what happens when the conversion amount is lower than the non-deductible contribution basis. Example: $5000 contribution to a non deductible 401k is now worth $4000. How is the $1000 difference between the basis and the conversion value treated for tax purposes at the time of conversion to a Roth 401k? Thank you
Permalink Submitted by Alan - IRA critic on Tue, 2022-03-01 20:19
In your example, the IRR (in plan Roth rollover) would be non taxable, so the question becomes what happens to the 1000 in after tax basis that is not applied to the IRR? That depends on the plan accounting rules. Some plans will carry over that 1000 for the rest of the year, some will carry it beyond year end into subsequent years, and some might extinguish it, forfeiting the basis. You would have to ask your plan how they deal with remaining basis after a distribution.