T-IRA to 401(k) & R-IRA roll-overs

Submitted by Viswa Bhattachar on Sat, 2022-05-14 11:52

Hello

I have two IRA accounts

1. Traditional/Roll-over IRA-1 with only pre-tax money from an old 401k, and
2. Traditional/Roll-Over IRA-2 with pre-tax money (from another old 401k) and after tax money (that I contributed over the years). I know the exact pre and after tax amounts in IRA-2 through my latest 8606 form.

I want to do the following before Dec 31 in the following sequence (by “direct”, below, I mean a trustee to trustee transfer):

1. directly roll-over/transfer all of IRA-1 amounts (all pre-tax) into my current 401-k
2. directly roll-over/transfer only pre-tax IRA-2 amount (including growth) into my current 401-k
3. directly roll-over/transfer after-tax (basis only) IRA-2 amount into my roth-IRA account
4. ensure that the total balance in my regular IRA accounts on Dec 31 is ZERO

My understanding is that all the above direct transfers/roll-overs are tax-free. Are the above transfers tax-free per IRS rules?

I am basing the above on an article by Natalie Choates available online: (https://www.morningstar.com/articles/832892/how-to-roll-over-an-ira-into-a-qualified-plan) which has links to IRS bulletins.



Submitted by Alan - IRA critic on Sat, 2022-05-14 14:52

Yes, your plan will work and all transactions will be tax free, but you will get 1099R forms and have to report all 3 with an explanatory statement with your return regarding the direct rollovers to the current 401k.



Submitted by Viswa Bhattachar on Sat, 2022-05-14 17:26

Thanks for your response.Does IRS’s pro rata rule then apply only to amounts that are withdrawn or cashed out from traditional IRA accounts that have both pre and post tax dollars in them?It appears the pro rata rule does not apply to amounts transferred from traditional IRAs to 401(k)s – pre tax $ – and R-IRAs – after tax basis only $. Is my understanding correct?



Submitted by Viswa Bhattachar on Sat, 2022-05-14 18:49

Also, can you please point me to the IRS regulation that governs my specific situation (outlined in my original post)? Thanks.



Submitted by Alan - IRA critic on Sat, 2022-05-14 20:07

Pro rating applies to all TIRA distributions and conversions, except that there is a special exception for amounts rolled over to qualified plans, that treats all such amounts as coming first from the pre tax balance of all your non Roth IRAs. This rule explains why you can leave only your IRA basis in your IRA and convert it tax free if there is no pre tax IRA balance at the end of the year. You can either convert the basis first or do the IRA to 401k rollover first, but the latter is safer and is what you are planning, because if the plan did not accept your IRA rollover and you converted first, then your conversion would be mostly taxable.



Submitted by Viswa Bhattachar on Sat, 2022-05-14 21:16

Can you please point me to the IRS regulation that mentions “special exception” to the pro rata rule? Also the post https://irahelp.com/slottreport/exceptions-pro-rata-rule-%E2%80%93-ways-%E2%80%9Cisolate-basis%E2%80%9D talks about how to isolate basis in an IRA.



Submitted by Alan - IRA critic on Sat, 2022-05-14 21:49

Tax code Section 408(d)(3)(H)(ii). 
This section is reflected in the following paragraph of Pub 590-A, p 21:
“Tax treatment of a rollover from a traditional IRA to an eligible retirement plan other than an IRA. Ordinarily, when you have basis in your IRAs, any distribution is considered to include both nontaxable and taxable amounts. Without a special rule, the nontaxable portion of such a distribution couldn’t be rolled over. However, a special rule treats a distribution you roll over into an eligible retirement plan as including only otherwise taxable amounts if the amount you either leave in your IRAs or don’t roll over is at least equal to your basis. The effect of this special rule is to make the amount in your traditional IRAs that you can roll over to an eligible retirement plan as large as possible. ”



Submitted by Viswa Bhattachar on Sat, 2022-05-14 23:14

Thanks for pointing me to the special exception regulation.What should I look for in 1099-R provided for T-IRA to 401k/R-IRA roll overs? My understanding is: Box 1: Funds taken out of IRA for roll over to 401k/R-IRA; Box 2a – this should be zero in my case, but the plan administrator could check box 2b (taxable amount not determined) and leave 2a blank; Box 7 – G (for amounts to 401k) and T (for amounts to R-IRA). Is there anything else I should watch for?



Submitted by Viswa Bhattachar on Sat, 2022-05-14 23:25

The very next paragraph says the following, but does not specifically call out 401(k). Are 401(k) plans considered “eligible” for the purpose of trustee-to-trustee transfer from T-IRA? Eligible retirement plans. The following are consid-ered eligible retirement plans.• IRAs.• Qualified trusts.• Qualified employee annuity plans under section 403(a).• Deferred compensation plans of state and local gov-ernments (section 457 plans).• Tax-sheltered annuities (section 403(b) annuities).



Submitted by Alan - IRA critic on Sun, 2022-05-15 02:04

Tax code section referenced above limits “eligible retirement plans” to qualified plans. IRAs are not included for this purpose. This applies whether the IRA is rolled into the 401k by direct rollover or by 60 day rollover.
The 1099R for your direct rollover to the 401k should have 0 in Box 2a and code G in Box 7.



Submitted by Viswa Bhattachar on Sun, 2022-05-15 11:45

Thanks for the clarification. The text in 590-A is a bit confusing. It says “the following are considered eligible retirement plans”, but does not list 401(k). However table 1-4 in 590-A clearly says 401k is included under “qualified plans”. Perhaps IRS is making a fine distinction between “eligible retirement plans” and “qualified plans” that I am not clear about.



Submitted by Viswa Bhattachar on Sun, 2022-05-15 18:03

Would the 1099R code for direct transfer from T-IRA to R-IRA (Roth Conversion) have a 0 in Box 2a and Code T in Box 7?



Submitted by Alan - IRA critic on Sun, 2022-05-15 18:16

No. box 2a will have the same amount as Box 1, an IRS requirement. 2a is then just a provisional taxable amount, with the actual taxable amount calculated by you on Form 8606. It can come down to 0 if your TIRA is composed solely of non deductible contributions.
No, Code T is a Roth distribution code. This is a TIRA distribution, so the distribution code will be 2 if under 59.5 and the TIRA custodian knows you converted to Roth. Otherwise, code 1 if you do a 60 day rollover conversion, or code 7 if you are over 59.5.



Submitted by William Tuttle on Sun, 2022-05-15 12:38

A 401k plan is the most common example of a “qualified plan“. As are profit sharing, cash balance, etc… plans.



Submitted by Viswa Bhattachar on Sun, 2022-05-15 13:58

I have already made the max allowable non-deductible, ie. after tax, contribution for tax year 2021 to my T-IRA. I deposited this amount in 2022 just before April 15 as allowed by IRS.
Can I make the tax year 2022 non-deductible (after tax) contribution to my T-IRA before I make all my transfers discussed earlier from the T-IRA to my 401(k) and R-IRA? Will I muddy the transfers or my 2022 tax return if I make my 2022 after tax contributions into my T-IRA now before making any transfers?
My workplace 401K allows after tax contributions (to the pre-tax + after tax + employer contribution) limits allowed by IRS. Are there any IRS limits for rolling over 401k after tax basis amounts to a R-IRA, and growth for that portion into a T-IRA while I also transfer basis amounts from my T-IRA to a R-IRA?



Submitted by Alan - IRA critic on Sun, 2022-05-15 15:18

You can make the 2022 ND contribution any time but since the entire purpose of these ND contributions and rollover to 401k is to do the back door Roth, you should complete the IRA to 401k direct rollovers first. Then you can make the 2022 contribution and immediately convert the 2 years of ND contributions to your Roth IRA. This conversion would include the entire balance in your IRA. If there is some small amount of gains in the IRA after your rollover to the 401k, you would still convert the entire remaining balance, but would owe tax on the small gains.
No, there are no limits, but doing a split rollover where the gains in the after tax account go to your TIRA will result in pro rating of any TIRA conversions UNLESS you roll the gains from the split rollover back into the 401k. If you have only a small amount of gains in your 401k after tax sub account, it is recommended to simply roll the entire balance of that account to your Roth and pay taxes on the gains. Do not split the gains off into a rollover to a TIRA unless you can time all these transactions so that any gains rolled to your TIRA can be included in the direct rollover of pre tax IRA balance into the 401k. That way you avoid any tax on gains. Otherwise, the 401k to Roth IRA rollover and TIRA conversions are independent of each other.



Submitted by Viswa Bhattachar on Sun, 2022-05-15 15:44

Is it OK to to retain the old T-IRA accounts (after zeroing out the balance via transfers to 401k and R-IRA) and use them for 2023 and beyond after tax contributions and roth conversions? OR, should I close them out totally and open new T-IRA accounts?



Submitted by Viswa Bhattachar on Sun, 2022-05-15 21:10

Does IRS allow any number of direct transfers of pretax amounts between T-IRA and 401(k) accounts in a calendar year? OR are there limits to the number of transfers?



Submitted by Viswa Bhattachar on Tue, 2022-05-17 17:43

Would it be better to roll over after tax basis amount from the commingled T-IRA to its own separate T-IRA first, and then do a direct transfer of the entire balance of pre-tax amount from the first T-IRA to an employer 401(k)? I could then do a Roth conversion on the after tax IRA account. Would this approach make the 1099-R’s cleaner?



Submitted by Alan - IRA critic on Sun, 2022-05-15 16:50

You can re use them. Most custodians will allow a 0 balance IRA to remain open for a couple years, if not longer.



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