Planning for 2010 ROTH conversion – qual plan rollovers
I just wanted to doublecheck the rules relating to IRA rollovers to qualified plans.
Here is a case that I recall from a few years ago:
[u]example A[/u]
1. Client has $20,000 in traditional IRA. About $18,000 is basis/nondeductibles
2. Client converts $20,000 to Roth IRA in March. IRA is now zero.
3. Later in year, client receives $15k distribution from former employer 401k plan – it was a forced payout – the plan authorized the distribution because the plan is not required to hold funds for former employees indefinitely.
4. The ROTH conversion was treated as partially taxable because a portion of the basis (about $7700) was allocated to the remaining IRA value of $15k at end of year.
[u] Example B[/u]
Here is the general case now.
1. Client maintains at traditional IRA with some basis/nondeductibles – for example $100k value and $20k of basis/nondeductibles
2. does it matter whether client executes a rollover of $80k pre tax dollars in 2009 or 2010? I think it does not matter because as long as the IRA value is zero at the end of the year (12/31/2010), it does not matter. Agreed?
In my example A, the problem was that there was a balance at end of year. Obviously one question to be asked is whether client expects to receive distributions out of qualified plans that might be rolled into that IRA.
Thanks for any feedback.
There are quite a few other examples that could be looked at.
Jim
Permalink Submitted by Alan Spross on Mon, 2009-06-08 21:53
Example A looks correct. Form 8606 determines the amount of a conversion that is taxable. It considers not just the year end IRA balance, but also includes distributions, outstanding rollovers and Roth conversions done during the year (lines 6, 7, and 8). In this example, the incoming 401k rollover diluted the basis in the IRA to a lower percentage, causing more of the conversion to be taxable that had the rollover not occurred.
In example B, are you referring to a rollover from the IRA of the pre tax balance into an eligible retirement plan? These do not count as rollovers on line 7 of Form 8606, and therefore IRA accounts can be drained of pre tax funds, allowing a Roth conversion of the remaining basis to be tax free. The pre tax 80k is essentially drained from the IRA, which allows a tax free Roth conversion. What counts on line 7 of Form 8606 has a much an effect on a Roth conversion as the existence of absence of a year end balance in determining how conversions are taxed.
Not sure if this answers your question or not. Also, the forced distribution is also somewhat odd in that it exceeds 5,000. A plan should generally not require such a distribution until employee reaches retirement age unless the balance is under $5,000. Possible that a loan is being offset here?