401k transfer to traditional IRA and backdoor roth
Client is 54 has an old employer 401k with 1.5 million
he wants to transfer 1.2 million to an IRA and transfer $300k to his current employer plan
Here is my question he has done a Backdoor Roth for $7,000 this year in Feb.
Will the aggregation rules apply if he does a transfer to a traditional IRA from the 401k.
All of his other IRA’s are Roth
Permalink Submitted by David Mertz on Wed, 2022-03-30 20:24
Yes, the resulting 2022 year-end balance in his traditional IRAs will greatly impact the taxable amount of his Roth conversion done in February, making it almost entirely taxable and leaving most of his basis in nondeductible traditional IRA contributions in his traditional IRAs to be applied proportionately to future distributions or Roth conversions.
Permalink Submitted by William Tuttle on Thu, 2022-03-31 14:39
Otherewize 98% of the current year Roth conversion will be subject to ordinary income taxes.
This will also preserve the ability to do future Backdoor Roths.
A 401k provides the far greater federal ERISA asset protection than IRA asset protection subject to variable individual state level protections.
Distributions from a 401k you separate from in a year you are >= age 55 are not subject to the early withdrawal penalty
Permalink Submitted by Alan - IRA critic on Thu, 2022-03-31 14:53
The proposed transfers would also eliminate any NUA potential that may exist in the former 401k plan. If there is such future potential, care must be taken to avoid any intervening distributions between the former separation from service and the next triggering event upon reaching 59.5.