Roth IRA conversion

Submitted by Eric Johnson on Wed, 2018-05-23 00:56

I have a Traditional IRA to which I have made non-deductible (after tax) contributions. To my 401k, I intend to rollover all of the deductible contributions and earnings from this Traditional IRA so that I can convert the non-deductible contributions from this Traditional IRA to my Roth IRA. My question is this; does it matter in which order I complete the two different maneuvers? Will it matter if I complete the Roth conversion first and then complete the rollover to the 401k? In other words, will the tax consequence be the same if the Roth conversion is first and the Rollover to the 401k is second -OR- for the desired tax outcome (no current taxation) is it necessary that the rollover to the 401k be completed first followed by the Roth conversion? (This question is stems from operational issues with the assets that will be converted to the Roth IRA from the Traditional IRA.) To date I have found no discussion of this question nor has my CPA. Thank you



Submitted by Alan - IRA critic on Wed, 2018-05-23 02:32

The final tax implications are the same regardless of the transaction order. Prior to the recent tax law changes eliminating recharacterizations of conversions, transactions were done in either order. However, now that you can no longer recharacterize the conversion should the 401k not accept the rollover for whatever reason, it is risky to convert first. The safe thing to do is complete the 401k rollover and as soon as the funds are deposited into the 401k the conversion can be done. That way you will not be stuck with the tax bill for your conversion should the plan reject the rollover.

Submitted by [email protected] on Wed, 2018-05-23 13:22

the challenge with that order is that the basis does not change but the account balance could change in the intervening time between rollover to 401k and conversion of basis.  For example 200k account balance with 50k of basis.  Rollover 150k to 401k, and once complete, a week later, convert the remaining balance.  let’s say the market dropped so that the value is now only 48k.  what happens to the 2k “lost” basis?  or, the balance may have gone up, due to the market going up, say to 52k.  now, 2k is taxable during the conversion. – m

Submitted by Alan - IRA critic on Wed, 2018-05-23 15:41

  • Correct. If taxpayer is concerned with this, they could sell shares and hold mm funds until after the Roth conversion. They will usually have to sell enough to fund the rollover check to the 401k anyway, so in this case sell 200k instead of 150k. If a loss of 2k is produced nonetheless, the 2k of basis is not lost as long as Part I of Form 8606 is generated since the remaining basis will end up on line 14 and carry forward. Part I is generated if taxpayer either makes a non deductible contribution for the conversion year OR leaves behind any amount in the TIRA, such as $10. Example – 50k remaining loses 2k to 48k, then convert 47,990 and there will be a Part I even if no contribution is made for that year.
  • Hybrid solution – exert extra effort to vet the 401k rollover, making sure the plan will accept IRA rollovers and if the IRA is contributary, make sure that the 401k will accept rollovers from non rollover IRA accounts. That will reduce the odds of a rollover denial, but there is always the risk that the rep was not sure, indicated rollover OK but was then overridden when the funds arrived.

 

Submitted by Eric Johnson on Thu, 2018-05-24 00:56

Thank you very much.

Submitted by Eric Johnson on Thu, 2018-05-24 10:40

You have touched on the detail that caused my post originally.  In my case, the process will be done in more than two operations.  First, more than enough will be sold in my Traditional IRA to create cash to perform the rollover from the Traditional IRA to the 401(k).  Next, most (not all) of the amount will be rolled over to the 401(k).  This will leave latitude to make up for the market value change that can occur when converting the Traditiona IRA to the Roth.  The Roth conversion consisting of the securities will then be completed being careful to undershoot the full amount of the non-deductible contributions (basis).  A few days after the securities are converted to the Roth, their value, and the value of the conversion will be known.  The difference between their value on the conversion date and the basis can be made up in cash which will require a second action to finalize the conversion to the Roth.  Once the Roth conversion is complete (the full basis is reflected in the Roth conversion amount), the remainder can then be rolled over to 401(k) completely evacuating the Traditional IRA.  This process was only decided upon after considerable consultation with my CPA and numerous conversations with my 401(k) plan administrator’s personnel and my brokerage company.  It is laborious but, for me, I expect it to be worthwhile. 

Add new comment

Log in or register to post comments