Roth conversion – 401(k) and Rollover Assets
Hi, everyone! Any input you can give on the following would be greatly appreciated…
We have a client who is currently enrolled in a 401(k) plan that accepts rollovers INTO the plan. This client is also interested in converting some of their IRA assets into a Roth.
Would it be possible for the client to roll some of the assets from the IRA Rollover INTO the 401(k) plan, and then convert the rest of the IRA Rollover assets to a Roth in the same year? If so, how would the “pro-rata rule” apply – would they have to include the assets that were rolled into the 401(k) plan since they were previously IRA assets? or will the assets rolled over into the 401(k) no longer be included since the pro-rata rule is based on 12/31 values?
I hope this makes sense – let me know if clarification is needed.
THANKS!
Permalink Submitted by Alan Spross on Wed, 2010-08-18 21:50
Your last statement is correct.
The pre tax amounts rolled into the qualified plan will not be counted for purposes of the pro rate rules. Under this strategy, if the qualified plan will accept IRA rollovers, the entire pre tax balance can be rolled to the plan, and then the after tax amounts left behind can be converted tax free. The 8606 Instructions confirm that the portion rolled to the qualified plan is NOT entered on Part I of the 8606 form.
The challenge is getting the plan to accept an IRA rollover, particularly if any of your IRAs are not rollover IRAs, but contributary IRAs. Some plans do not want to accept these rollovers because they are afraid of taking on non deductible IRA contributions and that is not allowed and will cause problems for the plan.
Permalink Submitted by Larisa Warren on Mon, 2010-08-23 15:01
Thank you!