Rolling Basis From Traditional IRA to Roth IRA
I have a traditional IRA for several years now. The Traditional IRA has $80K in it, of which $26K is basis (including 2015 contribution). I have a Roth IRA as well with $100K. Due to my income level, I have not been able to contribute directly to the Roth. My Roth balance comes primarily from after tax roll over from my 401k plan. I would like to leverage the backdoor IRA strategy to contribute to the Roth IRA by way of conversion from my Traditional IRA.
Since I don’t want to incur any tax liability at this point, my understanding is that I need to isolate the cost basis in the Traditional IRA account. As a first step, I rolled the $54K (i.e. $80K – $26K) pre-Tax balance over to my employer’s 401k plan. The remaining $26K is pure cost basis. The following step is to roll over the $26K cost basis over to the Roth IRA leaving the Traditional IRA with a balance of zero. From that point on, the Traditional IRA will simply be treated as a conduit where annual after-tax contribution will be made and then quickly rolled over to the Roth IRA account.
My question is the following: When I approach my bank (Wells Fargo) to roll the $26K over to the Roth IRA (both accounts are at Wells Fargo). The support staff asked me to recharacterize the $26K rather than roll over. The recharacterization form required me to recharacterize the $26K by contribution year (i.e. $5500 for 2015, $5500 for 2014, and so on). Is this correct? I thought recharacterization is only used when I make a mistake (i.e. contribute too much) and try to roll back my contribution.
Permalink Submitted by Alan - IRA critic on Wed, 2015-03-18 19:35
The support staff is totally incorrect, and it is bizarre they came up with this as it makes no sense. Really, all you need them to do is convert the remaining 26k of IRA basis to your Roth IRA. IRA custodians do not deal with basis and always treat distributions as fully taxable on the 1099R by IRS requirement. Your 8606 filed with your return is how you get credit for your basis. Since you have 26k of basis, the conversion will be tax free. Don’t fill out a recharacterization form, but you may have to insist on talking to different support people. It does not matter which year your contributions were for, and they do not need that information for reporting a conversion. The conversion should be done by “same trustee transfer”. In January you get a 1099R coded 2 showing 26k as the taxable amount. But with your 8606 the conversion becomes fully non taxable.
Permalink Submitted by Jonathan Sole on Wed, 2015-03-18 20:25
Thanks Alan! I knew it sounded strange. I will do the rollover then.
Permalink Submitted by Larry McMichael on Wed, 2017-04-26 12:05
I have a basis in Traditional iRA’s and would like to convert the basis amount into a Roth. The basis is not an isolated amount. It is comingled with other pre-tax IRA amounts. Is it possible for me to do this? I have been reporting basis on Form 8606 for many years with the IRS.
Permalink Submitted by Alan - IRA critic on Wed, 2017-04-26 20:57
The only way to convert the IRA basis without any taxable amounts is to roll your pre tax IRA balance into your employer plan if such plan will accept IRA rollovers. You can then convert the remaining IRA basis tax free.