Roth Conversion Question
Here is the fact-pattern:
1/1/16, client had a Roth IRA but no traditional IRA.
2/11/16 Made a non-deductible contribution to a traditional IRA in the amount of $6,500.
2/22/16 Converted the $6,500 to Roth several weeks later.
The expectation is that the conversion will not be taxable as there are no earnings in the IRA and 100% of IRA balance was converted.
In July of 2016 the client will close out a single person 401k and roll it to the IRA and leave it in the IRA throughout 2016 without any further additions or distributions. RMD is not required in 2016.
Question:
Would that action have any impact on the conversion done in February?
Thanks,
Bob
Permalink Submitted by Alan - IRA critic on Wed, 2016-06-29 21:51
Yes, the 401k rollover will result in the earlier conversion becoming mostly taxable per the pro rate calculations done on Form 8606. To have the conversion remain non taxable, the 401k rollover should be postponed to January if possible. If client has closed the business, the solo K plan must be terminated within a reasonable time. If the business is being closed now, client might be able to hold off till January, but if the business was closed quite some time ago, the 401k rollover might have to be done sooner rather than later. Another possible option if client will be employer elsewhere, is to roll the pre tax value of his IRA due to the 401k rollover into the new employer plan before the end of this year.