Pub 590 Worksheet 1-5: Contribution & Rollover Same Year
I’m looking at Pub 590 Worksheet 1-5:
http://www.irs.gov/publications/p590/ch01.html#en_US_2011_publink1000230849
I have a simple question: how is an IRA-to-401k Rollover of Pre-Tax IRA dollars to be reported, when the IRA also had some Basis (After-Tax) dollars intended to be left behind for Roth IRA conversion AND a Non-Deductible Contribution was also made in the same year?
I think I read somewhere (here) that you need to write something “explaining what you did” in Form 8606 … Is that to the exclusion of this worksheet?
What’s got me hung up is Line 5 of the worksheet. “Total distributions from traditional IRAs”. The instructions are not clear, but isn’t it true that Pre-Tax (above 8606 Basis) amounts distributed from a Rollover IRA and subsequently deposited into an Employer 401k within 60 days shoud NOT be included in this line?
Also, am I correct to interpret, that the sequence of Contributions, Distributions, Conversions, and Rollovers within a year are not relevant, since when everything comes together in this worksheet, the sequence of events is simply not a factor?
As indicated in some earlier posts, I am studying the strategies for Roth IRA conversion with “segregation of basis” in IRAs that have both pre/post tax contributions, by leveraging an employer 401k to “shield” the pre-tax money from distribution taxes, but now I’m adding this complication of Contribution in the same year.
Thanks
Permalink Submitted by Alan Spross on Tue, 2012-03-27 03:51
You don’t need worksheet 1-5 if you will not be deducting some portion of your 2011 contribution, due to being in the income phaseout range. Just complete Form 8606 directly as follows:
1) Enter your non deductible contribution on line 1 and on line 2 any prior basis left for 2011 from line 14 of your last 8606 prior to 2011
2) Line 3 is your total basis
That is all you do if you did not take a distribution/conversion in 2011, just made a non deductible contribution. If you did the conversion in 2011 then proceed as follows:
If you rolled over pre tax amounts to a 401k plan, do NOT show that balance on line 6 of Form 8606 as you suspected. Once it is out of your IRA it does NOT count in any pro rating of your conversion. If you roll ALL your pre tax IRA balance to a 401k and then convert the balance in the same year, the rest of Part I of the 8606 will indicate that the NON TAXABLE share of your conversion is 100%. This decimal goes on line 10, the non taxable amount of your conversion goes on line 11 and your remaining basis on line 14 is -0- because you used up your basis in the conversion.
Yes, the sequence of events is not a factor, but the order of things I would recommend are as follows:
1) Roll your pre tax balance of all your TIRAs into the 401k first – do this first because it is the most likely part of the strategy to hit a snag
2) Once done, make your non deductible contribution when you want to, but convert it right away. That will eliminate earnings or losses on your contribution before you convert.
If you have multiple TIRA accounts, it will make the rollover to the 401k easier if you complete trustee to trustee transfers of your pre tax balance into one IRA account such that this account holds your pre tax balance and no post tax balance. You will then just have to transfer that one account in full to the 401k plan.