Separating pre and post-tax during rollover FROM IRA to 401k

Submitted by Nicholas Jordan on Tue, 2022-10-18 16:17

I think I’ve messed this up, but if anyone has a solution, its probably this forum.
I have a rollover IRA from a past job, ~$100k, all pre-tax
April 2022 I contribute $6k to it for the 2021 tax year (post-tax)
Trying to roll the IRA over now to my current employer’s 401k plan so that I can do backdoor Roths this year and in future years.

Clearly I should have done this before making that $6k post-tax contribution, but is there any way to separate these so I don’t have to file a 8606 every year for 20 years to keep track of this money? I know exactly which money is which inside the IRA, as they are invested in different funds, but I don’t think that really helps me.
My employer also has a Roth 401k option if that helps.
I thought IRS notice 2014-54 might be helpful, but it seems to only refer to separating the pre and post-tax assets when rolling OUT of a 401k and INTO an IRA?



Submitted by Alan - IRA critic on Tue, 2022-10-18 20:18

If the 401k will accept an IRA rollover even though this IRA is no longer a rollover IRA, simply roll the IRA less the 6000 non deductible basis, to the plan. Then convert the 6000 to Roth. You will report the ND contribution on a 2021 8606, and the conversion on a 2022 8606. The conversion will be tax free. In fact, if your income it too high for regular Roth IRA contributions, you can make the ND contribution each year and convert it. Once you can no longer make ND contributions and have converted them each year, you will no longer have to file an 8606.

Submitted by Nicholas Jordan on Wed, 2022-10-19 00:30

Thanks!  The person we talked to at Vanguard (where the IRA is) said this wasn’t possible.  They said if we roll $100k over to the 401k, it would be subject to pro rata rules and would be ~6% (6k/106k) after-tax money.  The 401k is with Fidelity, I will inquire if they will accept it as you said.  We did report the $6k ND contribution on our 2021 8606.  The current account is also still classified (by Vanguard) as a rollover IRA, for whatever that’s worth.The $6k I put in has gone up by now to $7k, making the total $107k.  Do I roll over $100k to the 401k, or $101k?  I know if keep $7k in the tIRA and then do a roth conversion in 2022, I will pay taxes on the $1k gains, and that’s fine. I’m just trying to zero out this tIRA so that I can do clean backdoor Roth conversions in future years.  We are on the income borderline for regular roth contributions, so the backdoor Roth is simpler.

Submitted by Alan - IRA critic on Wed, 2022-10-19 01:43

  • The VG rep is incorrect, and we are seeing alot of this with CSRs these days. There is a special rule that eliminates pro rate calculations when an IRA is rolled into a qualified plan. This rule is on p 21 of Pub 590-A and is copied below.
  • “Tax treatment of a rollover from a traditional IRA to an eligible retirement plan other than an IRA. Ordinarily, when you have basis in your IRAs, any distribution is considered to include both nontaxable and taxable amounts. Without a special rule, the nontaxable portion of such a distribution couldn’t be rolled over. However, a special rule treats a distribution you roll over into an eligible retirement plan as including only otherwise taxable amounts if the amount you either leave in your IRAs or don’t roll over is at least equal to your basis. The effect of this special rule is to make the amount in your traditional IRAs that you can roll over to an eligible retirement plan as large as possible.”
  • You should roll all but 6000 into the 401k if you want your conversion to be non taxable. But if you want to increase your conversion to include some taxable amounts, you could retain more than 6000 in your IRA. Your conversion will then be taxable to the extent it exceeds 6000.
  • IRA custodian labeling of IRA status is inconsistent. Once you made the IRA Contribution into a rollover IRA, it ceased being a rollover IRA regardless of whether VG dropped the “rollover” from the title. But it does not matter as long as your 401k will accept the rollover. Of course, the 401k is not allowed to accept IRA basis, so you must leave at least 6000 behind in your IRA.

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