Roth Conversion

Submitted by MIKE KRUCHTEN on Sun, 2016-01-24 20:26

I have a client who has a Simple IRA thru his employer. Jan 2016 his employer has introduced a 401k and plan document will allow the Simple IRA to rollover to the 401k. Lets assume the Simple IRA rollovers on Feb 1, 2016. His MAGI is to high therefore we have been making Non Deduc Trad IRA contributions over the past years with theory his company would eventually create a 401k. Since the Simple IRA was in force on Dec 31, 2015 which will have a FMV on his 5498 should I wait to convert the Non Deduct Trad IRA until 2017? With the current market selloff he would be in a good situation to convert the day after he gets the notice that his Simple IRA has rolled into his 401k. I have asked numerous CPA’s and they feel I should wait until Jan 2017 for no other reason than to avoid confusion with the IRS since he had the Simple IRA in the beginning of 2016. I understand client may have to prove the transaction dates to avoid the pro rata conversion but if no Simple IRA exists on conversion date of Non Deduc Trad IRA then I feel conversion is fine without a prorate conversion.

His CPA has advised to wait until early Jan 2017 as well.

Any input?



Submitted by Alan - IRA critic on Mon, 2016-01-25 01:46

  • Has client satisfied the 2 year waiting period to do a rollover of the SIMPLE IRA?  Some employees might have met this requirement, others might not have. Employer should have warned everyone about this.
  • As for your question regarding pro rating of conversions, for a 2016 conversion all the calculations are based on 2016 distributions plus the 12/31/2016 non Roth IRA balance. The 12/31/2015 balance is meaningless. The SIMPLE IRA can exist on the conversion date but will not be included in the math as long as it is rolled out of the IRA by year end 2016, so that provides several more months toward the 2 year holding period if client has not yet met that requirement. The CPAs are incorrect about waiting to 2017 (although client might need to wait to meet the 2 year waiting period).
  • Further, client probably has a pre tax non SIMPLE balance from gains on the non deductible contributions. If the 401k accepts SIMPLE IRA rollovers, it may well also accept the pre tax dollars from the non SIMPLE IRA accounts. That would make the conversion completely tax free.

Submitted by MIKE KRUCHTEN on Tue, 2016-02-02 17:59

Thanks for information. What publication can I find the facts about using year end FMV of IRA’s regarding Roth conversion basis.

Submitted by Alan - IRA critic on Tue, 2016-02-02 18:50

All the math is done on Form 8606, both reporting the basis in non Roth IRAs and then determining the taxable portion of a Roth conversion. Line 6 is where the year end value of all non Roth IRAs is reported and then added into the pro rate factor determination:    https://apps.irs.gov/app/picklist/list/formsPublications.html;jsessionid=wtu6+uyNMnu4FvRLAhxL8A__?value=8606&criteria=formNumber&submitSearch=Find

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