Conversions.Multiple IRA’s

Submitted by David Berdow on Fri, 2024-02-02 17:04

Feedback on the most tax efficient way to get IRA money into a ROTH IRA, order of operation and realizing pro-rata rules may apply.

Client (20’s) has the following IRA’s and Qualified Retirement Plans (Values in Parenthesis)
1. Inherited IRA ($30k) (Inherited from Grandparent in ? year however taking annual RMD’s which are minimal)
2. Nondeductible IRA (opened a couple of years ago via recharacterization) in process of completing form 8606. ($6,500)
3. IRA ($30K)
4. Employer sponsored 401(k) plan. ($75K) (Will be leaving employer sometime Q2/Q3 2024).
5. ROTH IRA ($15K) established 2019.
6. ROTH IRA ($14K) established a couple of years ago.

Has means to pay taxes on conversions.

I do not believe the inherited IRA can be converted to one of the ROTH IRA’s looking for insight.

My understanding the 401(K) is excluded from the pro-rata rule calculation if the conversions (ROTH) take place today. However, could the 401(K) be included if the 401(k) is transferred to an IRA (traditional) in 2024 due to separation of service or should the transfer to the IRA be put on hold until 2025 if the employer sponsored plan allows?



Submitted by Alan - IRA critic on Fri, 2024-02-02 17:33

Correct that the inherited IRA cannot be converted to an inherited Roth IRA. The 401k should be left in place after separation or rolled into a new 401k plan to avoid pro rating of converted non deductible TIRA contributions (back door Roth IRA). If the 401k  is rolled into an IRA this year, any conversion done this year will be subject to pro rating which includes the balance of the rollover IRA on 12/31/2024.

Submitted by David Mertz on Fri, 2024-02-02 18:22

  • The balance of $75k in the 401(k) is large enough to avoid mandatory distribution upon separation of service, so it can remain in place until the year after the owned traditional IRAs are converted to Roth, if that’s desired.
  • The two owned IRAs are treated as a single account on Form 8606.  The inherited IRA is not to be entered anywhere on the client’s Form 8606.
  • If the client wants to incur all of the resulting taxable income (~$105k) in 2024, all of the traditional accounts (the owned traditional IRAs and, after separation from service, the 401(k)) can be converted to Roth in 2024 in any order.
  • If the 401(k) permits partial distributions, partial amounts of the 401(k) could be rolled directly to a Roth IRA in any year without affecting the pro rata calculation for the Roth conversions from the owned IRAs.

Submitted by David Berdow on Fri, 2024-02-02 19:41

Thank you

Submitted by David Berdow on Wed, 2024-02-07 22:03

Is the inherited IRA not part of the pro-rata rules when converting the Non-Deductable IRA? If so:From a tax effeciency stand point does it make sense to convert the pre-tax IRA in 2024 to the ROTH (100% taxable).In 2025 convert the non deductable IRA to the ROTH (Back door). Pro rata rules no longer play a role if the Inherited IRA ias excluded?Beginning in 2026 start a schedule to convert the 401(k) money to the ROTH IRA.  

Submitted by Alan - IRA critic on Wed, 2024-02-07 23:17

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