Roth Conversion Timing With IRA Rollover
Hi,
Q – Client wants to convert a whole small IRA to Roth in 2010 . 25K of the 30K IRA IRA was funded with non-deductible contributions. So we figure They will pay tax on $10k of it. At this point this is clinet’s only IRA (They have 401k/403bs though.
Same client also wants in 2010 immedciately thereafter Rollover a $100k 401K/403b to an Traditional IRA all pre tax dollars. Does this Rollover to IRA taint the first Roth Conversion and make most of that initial Roth conversion taxable (105K of 130K)? If so, can the 401K be rolled over the following year to avoid this problem?
Can you cite the IRS section if possible?
Thank you very much.
Permalink Submitted by Alan Spross on Fri, 2010-05-14 03:13
First, the numbers in your first paragraph indicate a taxable amount of 5k, not 10k.
The rollover of qualified plan assets to a TIRA before the end of 2010 WILL seriously dilute the tax free portion and make the conversion mostly taxable using the pro rate rules in the Inst for Form 8606. The IRA balance at the end of the distribution/conversion year is used to determine the pro rated share. By delaying the rollover to 2011, the 2010 conversion will not be affected and only 5 k will be taxed. That income can be deferred to 2011 and 2012, or client can opt out of the two year deferral and report the entire 5k of income in 2010.
Client could also convert the qualified plan amounts (or just one of the plans) directly without rolling to a TIRA first. Of course those conversions will be 100% taxable, and added to the 5k of taxable income from the TIRA conversion, client may then choose to use the two year deferral.