Isolating Basis
Hello-
Client had $20K Basis and $80K Pre-tax in Traditional IRA. The $80K pre-tax was sent via check to their 401k. The check has not been received yet by the institution but the client has already converted the $20K basis to their Roth (completed in 2021).
1. Even though the check is still on it’s way, my understanding is the basis is still isolated and the conversion is tax free. Is that correct?
2. It has been several weeks and the check has not been received by the 401k. If the check has to be stopped and replaced, is the conversion still tax free? Or is that money treated to have been in the IRA at the end of the year and therefore the conversion is subject to prorata?
Thank you!
Permalink Submitted by Alan - IRA critic on Tue, 2022-01-04 15:19
The IRA custodian has probably flagged the distribution check to generate a 1099R for 2021. If they had to stop payment and reissue in 2022, they probably will not change the 1099R or the Form 5498 showing the year end balance, but client will have to ask them to be sure. To be clear, as long as the 1099R and 5498 reflect a 2021 distribution, it does not matter when the 401k plan deposits the check.
Permalink Submitted by IRAQuestion5 on Tue, 2022-01-04 16:17
Okay, so as long as the 5498 and 1099R are reported as if it was done in 2021 than the conversion would be considered all after-tax?Also, in that case, the reissued check would still be considered to be entirely pre-tax money?
Permalink Submitted by Alan - IRA critic on Tue, 2022-01-04 16:25
Yes, that is correct.