Roth Conversion

Submitted by Keith Ellis on Tue, 2022-07-26 18:15

I have $2,000 in a traditional deductible IRA and $40,000 in a non-deductible IRA with $25,000 of it from contributions and $15,000 from earnings. Is there a reason I should try to roll the $2,000 into a 401(k)? I want to do a Roth conversion now to pay taxes on the $2,000 and $15,000 while in a low tax bracket to avoid paying taxes later. Does that sound good, or am I missing something?



Submitted by Alan - IRA critic on Tue, 2022-07-26 20:50

  • Your IRA basis (already taxed amount) is 25,000 out of a total balance of 42,000. If you roll the pre tax amount of 17,000 into your 401k you can convert the remaining 25,000 tax free. But since you are in a low bracket, you could simply convert the entire 42,000 and pay taxes on the pre tax portion of 17,000.
  • Since all your non Roth IRAs are treated as one combined account, there is little gained by just rolling 2000 into the 401k, since you still would have 15000 pre tax left in your IRA. and any conversion would still be mostly taxable.

Submitted by David Mertz on Tue, 2022-07-26 21:03

If your intent is to realize $17,000 of taxable income in 2022, you would just convert the funds from both accounts to Roth; there would be no reason to move $2,000 to the 401(k).  You can do this by converting each traditional IRA account to separate Roth accounts or combine them into a single Roth account, it’s up to you, but there is no tax reason to keep them separate.  If converted to two separate accounts, they are still treated as a single account for the purpose of determining whether any distributions from the Roth account before 2027 from this $42,000 would be subject to a recapture of the 10% early-distribution penalty.

Submitted by Brian Smith on Thu, 2022-08-04 17:45

Hello,Can you please help me out with the following.  Individual has pre-tax funds that went from SEP IRA to IRA a number of years ago.  They have been told by their accountant that they can now roll the IRA back into their 401(k).  Then the individual and their spouse can do $7000 per year contributions into IRA for each of them and then the next day roll them into a Roth IRA no taxes…but the Individual first has to move their IRA into their 401(k).   Both spouses are active participants in a qualified retirment plan.  Thank you for your help in advance.  Regards,  Brian

Submitted by Alan - IRA critic on Thu, 2022-08-04 19:12

Yes, this is an allowed series of transactions. They would each report a non deductible TIRA contribution on Form 8606 for each spouse, and the conversions would also be reported on the same 8606 if the conversion was done in the same year as the contributions were reported for. The conversions would be tax free. I assume from your post that only one spouse has a current pre tax IRA. If the other spouse also had one, they would have to also roll it into their own employer plan for the back door to work for each spouse. 

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