Nondeductible IRA rollover to company 401k plan
My client has a nondeductible IRA. He has been tracking the basis in this nondeductible IRA each year with the filing of Form 8606.
His new employer’s 401k plan allows rollovers of IRAs into the plan.
What is the process (mechanics, pitfalls) of rolling over the taxable portion of this IRA into the 401k plan and converting the balance left in the IRA to a ROTH IRA?
Permalink Submitted by Alan - IRA critic on Wed, 2025-09-24 17:21
It is recommended to complete the reverse rollover of the pre tax IRA dollars to the 401k before converting the IRA basis because sometimes the reverse rollover fails, perhaps because the 401k only accepts rollovers from rollover IRAs or there is a communication gap. If the basis was converted first and the reverse rollover failed, the taxpayer would be stuck with a mostly taxable conversion.
The IRA should also be converted to cash before doing these rollovers to make sure that last minute losses do not result in basis being rolled to the 401k, as that is not allowable. Once the 401k accepts the reverse rollover, the basis remaining in the IRA should be converted right away.
Obviously, the taxpayer needs to be sure that their 8606 forms were correct and the most recent ones reflect the correct basis on line 14. If a current year ND contribution is then made the basis from the last 8606 is increased by the amount of the current ND contribution.
Permalink Submitted by Keith Hiatt on Fri, 2025-09-26 11:58
Thank you…….one additional item. This client has two IRAs……one is a nondeductible IRA with “basis” (tracked on Form 8606) and one is a taxable IRA consisting of funds rolled over from a retirement plan. Do the taxable amounts from both IRAs need to be “rolled over” the the company 401k plan – with the nontaxable portion left in the one IRA? I am concerned about a type of prorata rule….that you can’t just treat the nondeductible IRA separately and do a reverse rollover with just this IRA and ignore the other one. Does this sound correct?
Permalink Submitted by Alan - IRA critic on Fri, 2025-09-26 14:50
Yes, the IRA basis is spread over all IRAs.
Therefore, the total value of both IRA accounts less the amount of basis is the amount that should be rolled over to the 401k. Instead of taking two distributions, a direct transfer of the pre tax amount into a single IRA account first might be easier, then have that entire IRA balance rolled over.