Small IRA w basis, Roth Conversion, then 401k Rollover

Submitted by Joseph Schwarz on Fri, 2024-04-26 20:13

Client has $500 in an IRA with a basis of $500 . (A Turbo Tax characterization from income being too high for a Roth Contribution.)

Client wants to convert this to his Roth IRA. Easy enough. Client also wants to Rollover an old 401k to his IRA.

If both of these transactions happen in 2024, will the Rollover nullify the Conversion? Meaning, will it make the $500 conversion be pro-rata to a larger amount even if the Conversion is done first?

Thanks

Joe

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Permalink Submitted by Alan - IRA critic on Fri, 2024-04-26 21:34

Yes, it will. The converted amount would become mostly taxable. If the excess contribution was only 500, it could just be removed with applicable gains, but the gains will be taxable in the year the contribution was made. The rollover could then be done with no downside except that client will be blocked from doing back door Roth conversions in the future as long as there are pre tax dollars in the TIRA.