aggregation rules
Retired individual had 401(k),TSP left with prior employers(all pre-tax). He made a full roth conversion with other funds from (non-deductable)IRA’s. He did not rollover the 401(k) and TSP in to an IRA until after he did the conversion, but later in the same year. He he subject to aggregation/proration of the qualified retirement plans in doing this conversion.
Thank you,
SC
Permalink Submitted by Alan Spross on Thu, 2011-03-17 22:27
Unfortuneately, yes. By rolling over these large pre tax accounts to a TIRA in the same year as the conversion, he diluted his basis from Form 8606. The total balance used in determining the pro rate factor is the 12/31 adjusted balance (adjusted for the conversion). The result is the same whether he does the conversion before or after the rollover if done in the same year. He should have waited until the next calendar year to roll over the employer plan funds.
Note that the pro rate percentage referred to above is fixed as of 12/31/2010 even though he will probably elect to defer the conversion income to 2011 and 2012. The 8606 determines the taxable amount of the conversion using the 12/31/2010 values, and then 50% of that taxable amount is reported in 2011 and 2012 each.
It is possible, but unlikely he could back this out. First, he would need to recharacterize the conversion back to a TIRA, then if he has a current employer (would have to go back to work) whose plan would accept IRA rollovers into the plan, he could roll the pre tax balance of his IRA into the plan. After that was done, he would have only after tax basis in his TIRA, which he could convert tax free. Since that conversion would be tax free, it would not matter which year he did it. The recharacterization deadline for the conversion is 10/17/2011 so his option is still open on that. Whether his conversion has made positive gains or losses would affect the decision to recharacterize. If he does not, perhaps that ability to split his conversion taxes between 2011 and 2012 will help.