Pension rollover to IRA effect on IRA to Roth conversion
Hello,
I recently changed employers and have an employer funded pension lump sum that I need to rollover into an IRA (about $18k). Given that money was never taxed, I’m assuming it will be a non-deductible IRA. Separately, I’d like to contribute $5k to a non-deductible IRA this year (income will be over the AGI limit to deduct) and convert it to a Roth. My question is, will I have to pay tax on any portion of the $5k contribution given the IRS looks at all of an individual’s IRAs in aggregate?
Thanks.
-Allen
Permalink Submitted by Alan Spross on Mon, 2011-07-11 18:04
If you want to continue making non deductible IRA contributions and converting them to a Roth IRA tax free, you cannot have any other pre tax dollars in any TIRA, SEP or SIMPLE IRA. That means that you would have to leave the pension lump sum with the former employer or roll it into the plan of your current employer.
If you roll the pension to a TIRA this year, it will be included in your year end balance and your conversion of 5k will be pro rated, ie your conversion would be 18/23 taxable. If you wait to do the rollover until January, your conversion will be tax free, but you will not be able to continue tax free conversions in future years once the pension rollover is in your IRA. Note that since the pension money is pre tax, it will also be a pre tax IRA if you do the rollover, NOT a non deductible IRA rollover contribution.
I assume your income is also too high for a regular Roth IRA contribution, or you would be doing that to get 5k into your Roth. The non deductible TIRA contribution and conversion will work just as well, but only if that 18k pension money is not part of your TIRA balance.
Permalink Submitted by Peter Lingane on Tue, 2011-07-12 15:16
Allen –
If a $5K nondeductible IRA is financially right for you, you would probably also benefit by converting your pension to a Roth IRA. I’m suggesting that you consider rolling the $18K pension to a traditional (deductible)IRA, contributing $5K (nondeductible) to the IRA and converting $23K to Roth (or converting one half in 2011 and one half in 2012.)