Roth conversion and mutliple qualified accounts

Submitted by Don Warnke on Fri, 2016-07-15 17:07

individual is planning to transfer 457 plan to IRA and then convert to roth ira. he currently has a contributory IRA with another custodian. would this transaction cause the IRA values to be aggregated and the ROTH conversion to be pro-rated if the accounts are kept seperate?



Submitted by Alan - IRA critic on Fri, 2016-07-15 22:51

Yes. Perhaps the conversions can be done directly from the 457 to the Roth IRA without first rolling to a TIRA.



Submitted by Don Warnke on Mon, 2016-07-18 19:54

if the 457 plan was combined with current TIRA and then partially converted, would this remove pro-rated issue?



Submitted by Alan - IRA critic on Mon, 2016-07-18 22:37

The  only way to eliminate pro rating would be to roll the pre tax value of all TIRA accounts into the 457, then convert the IRA basis tax free. In the year after this is completed, the 457 could be rolled back into the TIRA, and the TIRA would then be 100% pre tax. Of course, to be able to do this, the 457 must allow for acceptance of IRA rollovers.



Submitted by Don Warnke on Tue, 2016-07-19 21:05

so he can roll 457 into existing TIRA (at this point he would only have one TIRA) however if he want convert part of it to Roth later the amount converted would be some how pro-rated?



Submitted by Don Warnke on Wed, 2016-07-20 18:55

in your response you stated that the pretax TIRA should be rolled into 457 and convert basis to ROTH tax free, all of the TIRA is pretax, there is no basis in the TIRA, does this change anything as it relates to rolling 457 into TIRA and then converting part of it to ROTH?



Submitted by Alan - IRA critic on Thu, 2016-07-21 01:43

  • Once the pre tax balance of the IRA is rolled to the 457, the IRA is then 100% basis. The IRA can then be converted tax free to a Roth IRA. At the end of that year, there is no balance and no basis in the IRA. The following year if the 457 is rolled to the IRA, the IRA is then 100% pre tax (no basis). Any conversions thereafter will be 100% taxable. While the 457 could be rolled directly to a Roth IRA with the same tax result, the plan may not allow partial rollovers. In that case, the rollover to a TIRA will allow smaller conversions over a period of years to keep the tax rate down on these conversions.
  • The key here is the timing of these rollovers. The 457 rollover to the IRA cannot be done until the year after the IRA basis is converted tax free. If rolled back that same year it will trigger pro rating and most of the conversion will become taxable. The math done by Form 8606 illlustrates this.


Submitted by [email protected] on Thu, 2016-07-21 13:50

Don, you confused the question when you asked in the op “would this transaction cause the IRA values to be aggregated and the ROTH conversion to be pro-rated if the accounts are kept seperate?”  Pro-rating only occurs in conversions when there is basis.  Then you said there is no basis in the TIRA.  If the TIRA has no basis, you can roll the 457 directly to the TIRA or another TIRA and begin converting from one or combination and all of it would be taxable when converted.



Submitted by Don Warnke on Thu, 2016-07-21 15:42

thanks for the clarification mhotchkiss, is was under the impression that if to had multiple TIRA’s even if all dollars were pre-tax that if you took one of the TIRA and started doing partial conversions that they would take the amount converted determine what percentage it was of all TIRA’s combined and only that amount would be considered converted to RIRA. for example, if I had 2 TIRAs each with 50000 (all pretax in both accounts) in them and i convert $10,000 to ROTH that would be 10% of total of all TIRA accounts so 10% of the $10,000 would be converted and the remaining would still be considered TIRA.



Submitted by Alan - IRA critic on Thu, 2016-07-21 16:49

If all the dollars are pre tax, there is nothing to pro rate and your taxable amount is 10k. The %s of your total TIRA value does not matter in that case, but 10% of 100k is 10k, the same amount you converted.



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