Step Doctrine and IRA->401(k) roll-in
I have a client that opted for early retirement. He is 56 years old. Back in July 2014, we did an in-service rollover from his 401(k) to an IRA. At the time, the IRS did not allow for the division of after-tax and pre-tax monies. So we now have an IRA worth about $180k that has $5k of after-tax monies.
My initial thought was to roll that IRA back into the 401(k), leaving the after-tax monies behind and then convert them to a Roth. However, the employee will separate from service on Oct 1. At that time, he will receive a lump sum distribution from a pension plan.
I am curious as to whether we should be concerned about the step doctrine. Wondering if aggregation rules will impact when the Roth conversion should occur (2017 vs 2018)? Also wondering if aggregation rules will impact when and where the lump sum should be deposited (IRA vs 401(k)).
TIA.
Permalink Submitted by Alan - IRA critic on Tue, 2017-08-15 18:42
I wouldn’t worry about step transactions. However, if the 2017 LSD you refer to includes a direct rollover of the pension plan to a TIRA account, client will be right back where he is now faced with pro rating of his conversion on Form 8606 based on the adjusted year end 2017 balance of his TIRA. Instead, client should roll the pre tax portion of his IRAs to the 401k ASAP, convert the basis to a Roth IRA before year end, then do the direct rollover of the pension plan In January.