401k included in IRA basis?
A local Tax attorney brought up a danger notice that we may need to include other qualified plans in the calculation of total pre tax vs post tax amounts held by a taxpayer when figuring out how much is taxable in an IRA conversion to Roth (whereby one has some non deductible IRA’s in their portfolio.
I didn’t think there is anything to this, but wanted to check.
If not, then, what would be a good timeline to roll funds from their IRA to 401k, in order to make a contribution to non deductible IRAs in the future? Should they be conscious of the tax year they do this?….or can they just IE:
January 2 transfer all iras to 401k
January 3 contribute $6k to non deduct ira for 2009
January 3 contribute $6k to non decutct ira for 2010
January 4 convert to roth IRA
Sometime later roll available 401k back to IRA (the key with this item…..should the taxpayer wait until 2011 to do this or can they do this after the conversion?….then again in 2011?)
Permalink Submitted by Alan Spross on Fri, 2009-12-11 04:43
I would discount that notice. The only accounts used to pro rate basis in an IRA to Roth IRA conversion are SEP IRAs, SIMPLE IRAs and traditional IRAs, not other types of qualified retirement plans. Similarly, if someone converts a pre tax 401k containing some after tax contributions directly to a Roth IRA, the pro rating is done based on that particular plan only. Form 8606 does not apply.
When rollovers are made from an IRA to a qualified plan of the pre tax dollars, that transaction is not included anywhere on Form 8606, per the 8606 Inst for line 7. Accordingly, it can be done anytime during the year, and the pro rating on Form 8606 is done using year end IRA values. Therefore, you would not want to transfer any qualified plan amounts to a traditional IRA prior to the end of that same year or you will wipe out the advantage you created with the original rollover to the QRP.
Keep in mind that the 8606 treats all transactions as if the calendar year was only one day long and all transactions were done on that one day. So in some respects the order they are done does not matter, but the transfer to the qualified plan should be done before the conversion if you want the numbers to be pure. If you converted first, you would have trouble balancing the basis with the values and end up either having some of the conversion taxable or having more basis left than you had dollars to convert.