Roth conversion followed by DC plan rollover
If a taxpayer does a Roth conversion of existing IRA assets (all after tax money) today and then later this year rolls pre-tax money out the their DC Plan to a traditional IRA; could that have impact on the Roth Conversion?
thank you
Permalink Submitted by Alan - IRA critic on Thu, 2017-02-16 17:31
Yes, a very negative impact. It will result in the Roth conversion being mostly taxable. Form 8606 will calculate the taxable and non taxable amounts of the conversion. For example, if the DC rollover is 3 times the amount of the conversion, the taxable amount of the conversion will be 75% of that conversion. The rollover will also result in the same problem for future years if the taxpayer plans future back door Roth conversions. One solution could be to roll over the old plan to the new employer if taxpayer has a new employer that accepts such rollovers. This rollover could be done either directly or from the rollover IRA to the new plan. As long as the pre tax IRA balance has been rolled back out of the IRA by the end of the year, the conversion will still be non taxable. Or taxpayer could just leave the old DC plan alone. Note that if the DC plan is poor with limited investment options or high expenses and the balance is high enough, it might be a net benefit to roll it out even if it impaired the back door Roth conversions.