401k to IRA, back to 401k
Prospective client rolled over funds from a 401k to a new IRA. The client had an existing IRA with pre-tax funds that were contributed over the working years. However, these funds were deposited into a new ROLLOVER IRA and contained both pre-tax and after-tax funds. The prospective client now has two IRAs – one with all pre-tax from general contributions, and the second with both pre-tax and after-tax funds coming from the 401k rollover.
Client is now working with a plan that does accept rollovers. However, does the pro-rata rule count in this case? For example, can we segregate out the pre-tax and after-tax amounts of the rollover IRA and leave all pre-tax funds in the original traditional IRA? I’m thinking the 8606 would just aggregate the basis and attach it to both IRAs so that the prorata rule is applied in this rollover to the 401k.
We would like to roll those funds back into the 401k, so that they are able to withdraw the after-tax funds into a Roth IRA at some point in the future. Is this strategy a possibility?
Permalink Submitted by Alan - IRA critic on Thu, 2023-01-19 20:21
Client’s IRA basis is reported on Form 8606. The remainder of the total IRA balance is eligible for rollover to a qualified plan, but none of the basis. There is a special rule that avoids pro rating of basis when a rollover is made to a qualified plan, by treating the amount rolled over as applying first to the pre tax IRA basis. Therefore, all pre tax IRA dollars would be rolled over prior to any IRA basis which is not eligible for rollover. Because things can go wrong with these rollovers, the conversion of the remaining IRA basis should not be done until the pre tax portion has actually been deposited into the qualified plan.