IRA Basis & Roth conversion maneuvers
Pardon the basic question, this is not my specialty.
Suppose a taxpayer has a Traditional IRA with significant basis (several years of non-deductible contributions).
Suppose the taxpayer also has a Conduit IRA funded through a consolidation of old employer plans.
Taxpayer would like to convert the Traditional IRA to a Roth.
When the Conduit IRA is much larger than the Traditional IRA in a scenario like the above, will taxes on conversion of the Traditional IRA apply to almost the full amount converted? (based on a ratio of non-deductible contributions to total balance: the lower the ratio, the higher the tax bite)
Is there a possible maneuver where the higher taxes can be avoided by having the Conduit IRA first rolled into an employer plan, so that the majority of the Roth conversion can then be allocated from non-deductible IRA contributions?
Thanks
Permalink Submitted by Alan Spross on Mon, 2010-01-04 00:13
You are correct in your assumptions. The presence of the rollover (conduit) IRA dilutes the basis and results in the conversion from either of these account being mostly taxable.
The fix for this situation is the ability to transfer the rollover IRA into a current employer plan, leaving behind the contributary IRA holding the basis. While it is more difficult to get employer plans to accept contributary accounts, if you have one that will accept them, you could also roll the pre tax amount in the contributary IRA over as well leaving ONLY the basis behind. The conversion would then be entirely tax free.
Some taxpayers may be advised to leave their 401k plans in place for awhile if they have basis in their IRA. They can then convert them with minimal tax impact. After the year in which the conversions are done, then they can roll the 401k plan over to an IRA.
Permalink Submitted by A Ramos on Sun, 2012-03-11 13:59
Sometimes, employer plans do not accept rollover contributions.
Can this same maneuver can be successfully accomplished with a Solo 401(k)?
Thanks
Permalink Submitted by Alan Spross on Sun, 2012-03-11 17:47
Yes, if the solo K agreement allows incoming IRA rollovers.