401(k) to Roth IRA Tax Impact
My wife has two retirement accounts.
The first account is a Roll Over IRA containing $45000 in pre-tax contributions. We’ve already rolled this to a Roth IRA. We undertand that the we’ll have to pay federal and state income taxes on the entire $45000.
The second account is an old 401(k) worth $11000 of which $1500 is after tax, post 1987 dollars. We’d like to roll the entire amount to a Roth IRA, too, but the after tax dollars are giving us a slight bit of heartburn. As I understand IRS Pub 590, we’ll owe federal and state income tax on $9500, i.e. $11000-$1500.
Have we got this right?
Thanks,
Michael
Permalink Submitted by Alan Spross on Tue, 2010-11-23 05:41
You are correct.
The TIRA conversion will be reported on Form 8606 with the taxable amount transferring to line 15b.
The direct conversion of the 401k will be reported directly on lines 16a (11,000) and 16b (9,500). 8606 is not used for this conversion.
If the second conversion is done this year, the same election regarding the reporting of income will have to apply to both conversions, ie either deferred to 2011 and 2012 or both reported in 2010.
If you roll over the 401k to an IRA and convert from there instead of doing it directly, then the 8606 will apply to both conversions and the 1,500 in after tax rollover to the IRA will also have to be reported on Part I of the 8606. So doing the second one directly is simpler.
Permalink Submitted by Michael Dowd on Tue, 2010-11-23 14:22
Thanks.
Permalink Submitted by Michael Dowd on Tue, 2010-11-30 03:21
Follow up question…
ING, my wife’s 401(k) admin sent two separate checks. The first was for the pre-tax $ made out to the new trustee FBO my wife. The second check for the post tax $ was made out directly to my wife.
At the end of the day, we want both checks to end up in Roths. What is the best route for the post tax $? TIRA to Roth or directly to Roth?
Thanks,
Michael
Permalink Submitted by Alan Spross on Tue, 2010-11-30 03:44
It is more simple and direct to contribute the after tax amount directly to the Roth IRA, and make sure that the IRA custodian knows that it is a rollover contribution, not a regular contribution. That way, you do not have to reflect the after tax amount on Form 8606, both for going into the IRA and out of the IRA via conversion. However, you will still need the 8606 for the conversion she already completed.
That said, if the pre tax check must go into the TIRA first, meaning that another TIRA conversion will have to be done, then it does not make much difference whether the after tax amount goes through the TIRA or directly to the Roth.
The end result is the same, ie all these funds end up in the Roth by conversions, and the tax due is the same either way.
Permalink Submitted by Michael Dowd on Tue, 2010-11-30 14:32
Thanks…again.