Build Back Better / 401k Rollover to Roth IRA
Hi – long-time reader, first time posting.
My company has a traditional 401k and allows us to put in up to $5000/year in after-tax contributions. Since IRS Ruling 2014-54 undoing the cream-in-the-coffee rule, I have rolled my after-tax contributions to my 401k into a Roth IRA. The after-tax contributions must season in my 401k for 24 months, so in January 2021, I rolled the 2019 contribution into a Roth IRA. Although the dollar amount isn’t “super” or “mega,” this seems like the “super” or “mega” Roth IRA rollover situation.
Under Build Back Better, which hasn’t passed as of today, it looks like the “super” or “mega” Roth IRA rollover would be toast. So I guess I’m now into crystal ball land…
* In January, 2022, I plan to call to do my annual rollover of my January, 2020 after-tax contribution. If Build Back Better passes after 1/3/2022, anyone have a guess as to how this rollover might be handled? Allowed because it has already happened? Disallowed but I would be given an opportunity to undo the rollover and put the money back into my 401k? I’m assuming (but I know what happens when one assumes) that there is probably some precedent/analogy for something like this?
* And further into crystal ball land… I would assume that if I make a 2022 after-tax contribution to my 401k, I’m gambling that I would be allowed to roll that into my Roth IRA in 2024. If BBB dies on the vine and the status quo stays, then yes, I would. But tax laws change all the time, so my attitude is I can only make the best decision I can today, based on the rules of today.
Wondering if anyone has any insight or different point of view?
Many thanks!
Permalink Submitted by Alan - IRA critic on Sat, 2021-12-18 00:55
I wouldn’t do the rollover unless you are prepared for it to be reported as taxable when the 1099R is issued in Jan, 2023. Odds are it would be non taxable, but no guarantee.
The 2024 Roth rollover is less likely since Congress is not going to consider the rather unusual restrictions of your specific 401k plan, and now you are going 2 years further out.
Am curious what you have been doing about the earnings generated on your after tax contributions. They must be distributed along with the earnings, so your normal options would be a split rollover with the gains going to your TIRA, or rolling the entire sub account to your Roth and paying taxes on the gains. Gains would tend to me more whatwith the 2 year waiting period.
Permalink Submitted by tomtom on Sun, 2021-12-19 12:38
My employer Simple IRA is now of 2 years duration. As a young investor in the 12% marginal bracket this would be initiated in 2022. Is there a preferred mechanism for transferring a percentage of this Saving Plan to my other tax -advantaged vehicles? Need this transfer first go to an IRA before conversion to Roth IRA? Is there an annual limit for how many for Simple IRA to IRA transfers may occur?Finally, 2022 may be the year for my one-time IRA to HSA roll-over. Does this then satisfy my HSA annual limit? That is, may I complete this roll-over AND contribute employer sponsored pre-tax HSA funds in the same year?Thank you for your insights
Permalink Submitted by Alan - IRA critic on Sun, 2021-12-19 16:45
Once your 2 year waiting period is completed, there is no limit on how many distributions and transfers you can do. Conversions can be done by direct transfer from the SIMPLE IRA directly to the Roth IRA.
The qualified HSA funding distribution represents an optional source for HSA contributions you are already qualified to make. Instead of the usual deductible HSA contribution made with new money, the qualified HSA funding distribution comes out of the pre tax portion of your IRA, so there is no current year tax deduction, and the total value of your HSA and IRAs combined remain the same. It is better to make the usual HSA contribution to the extent your employer does not if you have the funds to do it. You cannot make an HSA funding distribution from an on going SIMPLE IRA. You would have to first transfer it to a TIRA before doing the funding distribution. Note that the funding distribution is reported as a rollover, but must be done by direct transfer. This transfer does NOT count against the one rollover limit per 12 months.
If your HSA is employer funded, the amount contributed by the employer reduces the amount that you can contribute and deduct yourself, or the amount that can be tranferred from your IRA. As such, there are 3 possible sources to fund your annual HSA contribution limit, and there is no way to increase your HSA contributions above that contribution limit. If your employer will make a meaningful employer contribution to your HSA, there is no sense in wasting your one time HSA funding distribution for a small difference between what the employer contributes and your HSA contribution limit.