Rollover into 401k followed by conversion to a Roth IRA

Submitted by Christopher Combs on Thu, 2017-12-21 16:18

Dear Alan,

I have a client who has a $120K pre-tax balance in a Traditional IRA. He has no other Traditional IRAs. Here is what he’s interested in doing:

1. Making a $5,500 non-deductible contribution for 2017 sometime between 1-1-2018 and 4-15-2018.

2. Making a $5,500 non-deductible contribution for 2018 sometime after 4-15-2018.

3. Converting the $11,000 balance over to his Roth IRA.

4. Rolling the $120K pre-tax IRA balance up into his 401(k).

My understanding is that, as long as he completes Step #4 by 12-31-2018 he’s in good shape for the conversion to be tax-free because the Traditional IRA balance will be $0 by 12-31-2018.

Does this sound right to you?

Thanks in advance,

Chris



Submitted by Alan - IRA critic on Thu, 2017-12-21 18:31

  • Yes Chris, that is correct. However, with the new tax bill he will not be able to recharacterize the conversion in the event that his 401k plan does not accept IRA rollovers or does not accept IRA rollovers from IRA accounts that are not rollover IRAs because they received regular IRA contributions like his. He would then be stuck with a mostly taxable conversion.
  • To reduce that risk, if his 120k TIRA is a rollover IRA (funded only by an employer plan rollover) he should make his new contributions to a newly opened TIRA. He can then state that the IRA to be rolled to the plan is a rollover IRA and that should make a difference if his 401k only accepts IRA rollovers from rollover IRA accounts. If there is any doubt at all about the 401k rollover, he should wait to convert the 11k until after the 401k rollover is complete to avoid being stuck with a taxable conversion.

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