Roth Conversion with Ded. and Non-Ded. Funds

Submitted by Francis Giordano on Tue, 2017-12-19 17:59

1) Current IRA has 400k total. If 100k is deductible and I convert all 400k the I understand I will be taxed on the 100k. However if I convert 100k to my current 401k then my remaining 300k should all be non-deductible. Can I then convert the 300k to Roth IRA and incur no tax liability?

2) Does it matter when or what order I do the rollovers? If I convert the 300k into the Roth and then rollover the 100k into the 401k a week later (same tax year) is that OK since I “technically” had 400k in the original IRA when I did the Roth conversion?



Submitted by Alan - IRA critic on Tue, 2017-12-19 19:34

  • Are you sure your numbers are correct?  It is very rare that a TIRA account of this size would hold 300k of IRA basis. What do your 8606 forms show for your total basis? 
  • If you did a direct rollover of the pre tax amount (whatever that amount is) to your 401k, you could then convert the IRA basis to a Roth tax free. 
  • You can do the rollovers in any order. But it is risky to undertake this now because the 401k rollover will probably not get done by 12/31, and that would leave you with a partially taxable conversion if you convert this year. Are you sure that your 401k will accept IRA rollovers from IRA accounts that are not rollover IRAs?  And recharacterization of 2017 conversions may be a problem under the current tax bill. So given the current unique dynamics I would definitely complete the 401k rollover before converting. If your conversion is tax free it does not matter if you do it this year or in January even if there is a small amount of gains in the IRA after you start the 401k rollover.

Submitted by Francis Giordano on Tue, 2017-12-19 22:22

 “Are you sure your numbers are correct?  It is very rare that a TIRA account of this size would hold 300k of IRA basis.”Actually tried to keep math simple. 100k is post-tax. 300k is pre-tax. i have a 200k loss that I’m taking this year vs. ordinary income. Leaves me with 100k balance that I hope to rollover to 401k.

Submitted by Alan - IRA critic on Tue, 2017-12-19 23:29

300 pre tax and 100 post tax is certainly more likely than the reverse that you posted first. To clarify, with this breakdown, you would roll 300k to the 401k. You can only roll the pre tax amount to a 401k, and you wouldn’t want to roll more anyway because you want to convert the after tax amount. So roll 300k to 401k and be sure not to include any of your 100k basis in the rollover. Then you can convert the 100k to your Roth IRA. Finally, you cannot write off any of a 200k loss since IRA cap gains and losses do not apply to IRA accounts. Note that there is a misc deduction for closing all your TIRA accounts for less than the basis, but since your account is still worth far more than your basis of 100k, you cannot use the misc deduction either.

Submitted by Francis Giordano on Wed, 2017-12-20 14:16

I understand that IRA cap gains and losses do not apply to IRA accounts. I guess my thought was if I rollover 300k to Roth (after 100k to 401k) then 200k is taxed as ordinary income since I have 100k post tax. I was going to offset that with my 200k business loss .   Also, thanks for your help on this.

Submitted by Alan - IRA critic on Wed, 2017-12-20 18:23

OK – if you have a net operating loss, you can use that to offset the taxable income from a conversion. However, you need to be sure of our NOL before doing the conversion, because you will not be able to recharacterize any conversion done in 2018, and MAY NOT be able to recharacterize a 2017 conversion after 12/31. This last issue is still under debate because the tax bill is not clear. Also, note that personal exemptions and itemized deductions cannot be applied in addition to the NOL. Therefore you should probably have a tax account verify the amount of your taxable conversion (200k in your example) before doing the conversion due to the recharacterization gray area as we end 2017.

Submitted by Francis Giordano on Wed, 2017-12-20 18:48

Got it.   Thanks!

Submitted by Francis Giordano on Thu, 2017-12-28 17:03

Last wrinkle…. Was able to convert 300k to roth leaving me 100k that was to be rolled to 401k by 12/31. This will not happen in time (surprise).   Can I take distro. of 100k balance today and rollover to 401k within 60 days to avoid pre-tax/post-tax pro-rata issues? Goal is to make this conversion and rollover an entirely “2017” tax year exercise.

Submitted by Alan - IRA critic on Thu, 2017-12-28 17:10

Yes, you can do that and your TIRA balance will be 0 on 12/31, making your conversion non taxable. However, if your plan does not accept the rollover for whatever reason, you will get burned. Do you have an indirect rollover left to put it back in the TIRA in the event the plan does not accept the rollover?  Also, remember to decline any withholding from the TIRA distribution.

Submitted by Francis Giordano on Thu, 2017-12-28 17:13

They said they do accept – we shall see. Have not done any rollovers in last 5? years. And yes will decline any withholding. Many thanks again,

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