Reverse Rollover to 401K
Looking to perform a reverse rollover using a traditional IRA with basis to an active 401k plan. The 401k plan will accept pre-tax IRA rollovers. Once the reverse rollover to the 401K is complete, does the conversion of basis remaining in the IRA to the Roth IRA have to occur in the same tax year as the reverse rollover? Since Form 8606 tracks basis, would there be any downside beyond the accumulation of earnings by doing the conversion in a subsquent year. Thank you.
Permalink Submitted by Alan - IRA critic on Tue, 2025-09-30 20:14
You can convert the basis any time you wish, but it is typically done right after the reverse rollover has been accepted by the 401k plan.
If you wait, there are different scenarios. If your remaining basis is kept in cash (MM fund), it will gain only a small amount, which will be taxable in the year you convert. No real problem there. But if it is invested in securities, you could have a considerable gain or loss. If a gain, then the conversion will have higher taxable gains, but if a loss then your conversion will be less than your basis. That could result in loss of your remaining basis unless you arrange to have that remaining basis showing up on line 14 of Form 8606. You can generate the line 14 by either making a new ND contribution in the year you convert OR converting a little less (eg $100 less) than your balance. Either of these two options will require you to complete Part I of Form 8606 on which line 14 will show your remaining basis for future use.