Timing of IRA rollover to 401k before Roth conversion of remaining IRA
I have a client that currently has funds in an IRA. She has started a new business so we are establishing an Individual 401k. We have discussed rolling her IRA in to the Individual 401k, and then making a non-deductible IRA contributions (this week so we can make it a prior year) and then immediately converting it to a Roth. My question is on the timing requirements of when the funds must be out of the IRA so as not to trigger any pro-rata calculation of taxes on the conversion. Do the funds have to be out of the IRA only before the conversion date? Or do they have to be removed before the end of the calendar year in which the conversion was done (i.e., 12/31/16)? Or is there some rule that requires they have to have been removed prior to the year in which the conversion is done (in this case, would have had to been done by 12/31/15)? I have reviewed Form 8606 for more direction on how the information must be detailed on the return, and it seems that it is stating that we would have needed to move the IRA funds to the 401k by 12/31/15, but can you please confirm this. Thank you in advance.
Josh Self
Permalink Submitted by Alan - IRA critic on Mon, 2016-04-11 17:38
The pre tax TIRA funds need to be out by 12/31/2016, so client has plenty of time. The contribution of course must be made in the next week and the conversion can be done right after the contribution. If client has the cash, the 2016 contribution could be done as well and both contributions converted together.
Permalink Submitted by [email protected] on Mon, 2016-04-11 18:05
Ok, well that’s good news. So she can make a 2015 and a 2016 TIRA non-deductible contribution this week in to the IRA that currently still has money in it, then convert that contributoin to the Roth immediately. And as long as the remainder of the IRA is moved to the 401k by 12/31/2016, then she is in the clear from the pro-rata calculation? I just want to make sure I understood you correctly. I guess that makes sense since I was looking at the 2015 8606 which would logically request the 12/31/2015 in line 6. Then, along the line of your comment, the 2016 8606 would request the IRA balance as of 12/31/2016, as you stated above. Please help clarify my questions one more time, and thanks for your help!Josh Self
Permalink Submitted by Alan - IRA critic on Mon, 2016-04-11 18:30
Correct. The 2015 8606 would only be used to report the non deductible contribution. You would not go to line 6 on the 2015 form since there is no distribution in 2015.The conversion and any 2016 non deductible contribution goes on a 2016 8606.