roth IRA

Submitted by peter hsi on Tue, 2018-08-14 01:37

Hi,
i have an IRA account that was funded by after tax contribution. Over time, the accumulated earning (gain) in the account is about 40% of the total balance (say it differently, my basis is about 60% of the balance). I like to covert this account to Roth IRA. Can I roll 40% of the balance (i.e. the pretax gain) to 403(b)? If so, can i then convert the remaining 60% (basis) to Roth IRA without additional income tax? Thanks
Peter



Submitted by Alan - IRA critic on Tue, 2018-08-14 02:02

Yes, you can do that if your 403b plan accepts IRA rollovers from contributary IRA accounts. This assumes that this account is your only non Roth IRA account. If you have others, they must all be included in the calculations of the taxable amount of your conversion.

Submitted by peter hsi on Tue, 2018-08-14 17:58

Yes, I only have one IRA account.  I am hoping to do the roll over (40% of balance) in a couple months and then the Roth conversion (60% of the balance) before the end of the 2018.   My current IRA account should have a zero balance (60% current balance in a new Roth IRA account) by 12/31/2018.  Mostly importantly, i will not have any incremental income tax due to Roth conversion.  Do you see any watchout/issues with this plan?  Thanks.Peter

Submitted by Alan - IRA critic on Tue, 2018-08-14 18:37

Yes, complete the rollover to the 403b first and give yourself plenty of time. Once you are sure that the rollover has been accepted and deposited into your 403b, then do the conversion. There might be a small loss or gain in your IRA during the time before the conversion, and this small gain will be taxable but that should not be a problem. Finally, because your 403b plan will not issue a 5498 reporting the rollover, when you file your tax return for 2018 be sure that an explanatory statement is made regarding the rollover to the 403b. That should eliminate the chance of the IRS sending you an inquiry down the line since the IRS receives nothing else to confirm that you rolled IRA money into a non IRA plan.

Submitted by peter hsi on Fri, 2018-08-17 14:57

I shared the plan with my contact at Fidelity.  He seems to believe my basis will be reduced pro-rata by the amount roll over to 403(b).  Say it differntly, i can’t specify the roll over amount is only from the pre-tax gain (not basis).  Can you share with me the code/reg sections on this so i can forward it to him?  Thanks     

Submitted by Alan - IRA critic on Fri, 2018-08-17 16:14

  • The Fidelity rep is incorrect. A qualified plan is not even allowed to accept basis from an IRA account. There is a special rule to deal with this stated in Pub 590 A, p 21 as follows.  “A special rule treats a distribution you roll over into an eligible retirement plan (other than an IRA) as including only otherwise taxable amounts if the amount you leave in your IRAs or don’t roll over is at least equal to your basis.”
  • Tax code reference is Sec 408(d)(3)(H).

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