Roth 401K Recharac. to Non Deductible IRA
I recently recharacterized a 2007 Roth IRA contribution to a non deductible TIRA contribution and added it to an existing rollover account I had which contained a 401K rollover from a previous employer. My plan is to recharacterize everything to a Roth in 2010. I am now making non deductible 2008 contributions to this account. Is there any downside to having combined the 401K rollover $$’s with these new non deductible contributions vs putting the 2007 and 2008 contributions in a separate account ? Is it going to complicate the 2010 conversion ? Per previous advice from this forum I filed forms with the IRS to show the recharacterization and will keep track of the basis on the account. I am trying to minimize the amount of accounts and funds I have but don’t want to cause additional problems down the road.
Thanks.
Permalink Submitted by Alan Spross on Tue, 2008-09-02 20:51
The only potential downside would be in the area of creditor protection under the bankruptcy Act. Under this law, assets in IRA accounts that contain ONLY employer plan rollovers have unlimited dollar protection. Once these accounts receive regular IRA contributions, the limit is 1,000,000 for all such accounts. This is not an issue if you live in a state that provides unlimited creditor protection on IRAs or if you will never have more than 1mm in IRA assets. There is no tax related downside for combining the accounts, since all your traditional IRA accounts are considered as one combined account for tax purposes.
If you amended or have not yet filed your 2007 return, be sure to report the non deductible contribution from the recharacterization on Form 8606, and bring the balance forward each year you add non deductible contributions. When you convert in the future a pro rated portion of the conversion will be tax free because of the basis from non deductible contributions in your traditional IRA.
Permalink Submitted by Mark Taylor on Tue, 2008-09-02 21:00
I filed the 8606 and noted the non deductible contributions. I’m happy to leave it where it is now. Thanks for the help.