Roth Conversion Question

Submitted by Andy Reynolds on Fri, 2016-12-16 18:57

I have a client that currently has a Traditional IRA (12/16/16). She is going to direct transfer the IRA into her 401k in 2016. At the end of 2016, she will have a $0 account balance across all IRAs.

In 2017, we would like to make a 2016 and 2017 NON-DEDUCTIBLE Trad. IRA contribution and then immediately convert it to a Roth IRA.

Since she will have a $0 account balance in her IRA as of 12/31/16, will the basis for the conversion be equal to the account value assuming no growth?

In other words, will this strategy allow for an avoidance of the pro-rata rule for her 2016 contribution?

Thanks for the help.



Submitted by Alan - IRA critic on Fri, 2016-12-16 19:45

Yes, but only if she does not roll any qualified plan money into her TIRA before the end of 2017. Taxation of her conversion is calculated at the end of 2017 not on the date of the conversion, so she will need to have a 0 TIRA value on 12/31/2017. The result would still be the same if she did not roll her TIRA into the 401k until Dec, 2017 since the conversion is being done in 2017. Therefore, there is no reason to worry that the current rollover will not get processed before the end of this month unless she also did a conversion earlier in 2016 which included basis she had in her TIRA before the 2016 and 2017 contributions.

Submitted by Christopher Hess on Fri, 2016-12-30 21:06

I have a similar question.  My Client has a small ($1500) TIRA.  In 2016 he made a non-deductible IRA contribution of $6500 (over age 50).  He then converted $6500 to a Roth IRA.  He was going to also convert the $1500 via an indirect rollover but failed to do so in 2016.  The $1500 TIRA was liquidated the last week of 2016.  He is planning to put that back in the TIRA within 60 days.  Since that will not show as an end of year 2016 balance, will the entire $6500 be converted to the Roth without any pro-rata?  In 2017 he is planning to do a very large 401(k) rollover, so that is why we wanted to get everything done in 2016.

Submitted by Alan - IRA critic on Sat, 2016-12-31 00:17

Client has two options with respect to the 1500. He can roll it back to the TIRA within 60 days if he has a rollover available considering the one rollover per 12 month rule. Or he can still convert the 1500 to a Roth IRA within 60 days and this will be considered a 2016 conversion because he took the distribution in 2016.

  1. There is a rule regarding outstanding rollovers which are not in any IRA as of year end. Here we are referring to 12/31/2016. If he decides to roll the 1500 to a TIRA, he will have to report a year end TIRA balance of 1500 on Form 8606. The result will be that his 6500 conversion will have a taxable amount of 1,219 under the pro rate rules. He will also have a remaining basis to carry forward of 1,219 on line 14 of Form 8606.
  2. His other option is to convert the 1500 to his Roth IRA within 60 days. He will then have a total of 8000 converted in 2016 of which 1500 will be taxable. This is treated as a single conversion on Form 8606 for tax purposes. His entire basis of 6500 will be applied and he will not have to deal with future 8606 forms to maintain that small remaining  basis. Under the circumstances, he should probably convert the 1500 as this will be much simpler in the long run. I am assuming here that the 1500 TIRA is pre tax.

Add new comment

Log in or register to post comments