XFER R/O IRA TO 401K PRIOR TO ROTH CONVERT

My understanding is that a taxpayer can rollover an existing Rollover IRA into their current employer’s 401K Plan, so that the value of the Rollover IRA will NOT be included in the IRA Aggregation for calculating the taxable portion of a subsequent Roth Conversion of other Traditional IRAs. I further understand that this strategy will work provided you do NOT do the Roth Conversion in the same tax year that you rolled the Rollover IRA into the current employer’s 401K Plan.

Is this strategy viable & is it required that both transactions do NOT occur in the same tax year?

Love your feedback & any other related issues for consideration!



Yes, this strategy will work, but ONLY if the plan will accept IRA rollovers. Some plans will only accept rollovers of “rollover IRAs” but not contributary IRAs, because they are afraid of receiving non deductible contribution amounts which are not allowed.

If the plan will accept the IRA rollover of the pre tax balance in all IRAs, the conversion will be tax free. The conversion can be in the SAME YEAR as the rollover or the following year. The conversion can also be done BEFORE the rollover in the same year, but if the rollover does not get completed it will probably result in the conversion having to be recharacterized to eliminate the tax bill. Therefore, if there is any question about the plan accepting the rollover, the rollover should be completed first and the conversion done immediately afterward to eliminate any earnings buildup in the TIRA before conversion.

In preparing for the rollover and limiting it to one IRA account, the IRA balance can be partitioned by direct transfer so that the pre tax balance is in ONE IRA account and that account will be transferred to the employer plan. The other IRA will hold the after tax amount to be converted to a Roth IRA.l



My client only has 1 IRA currently, which is the Rollover IRA. The Rollover IRA is all pre-tax contributions & growth, which was previously rolled over from former employer into a Rollover IRA account. This account is pure & no taxpayer IRA contributions have been made to this account.

My client is in max tax bracket now & not eligible for Roth IRA contributions. The approach I plan on using is to rollover the Rollover IRA into current employer 401K Plan. Next establish & make max NON deductible TIRA contributions each tax year into a new TIRA. Then immediately after the TIRA contribution hits the TIRA account, I will do the Roth Conversion each year. Essentially this should result in no taxable Roth Conversion amount.

I had previously been told by very knowledgeable CFP/Attorney that it was important that I do the rollover of the Rollover IRA into current employer 401K Plan in one tax year & then do Roth Conversion in subsequent tax year. Bottom-line: wait & do NOT do both in same tax year. Given the calculation of taxable amount for Roth Conversion, it didn’t seem definitive to me that you could NOT do both transactions in the same tax year since the Rollover IRA balance would NOT exist @ 12/31/xx for the calculation.

So, the bottom-line: you are saying that both rollover & Roth Conversion can be done in the same tax year? Therefore, no reason for me to rush to get rollover completed before end of 2011 tax year, so I can do the Roth Conversions staring with 2011 tax year contribution, which we would make in early 2012?

Thanks & Happy Holidays!



That should work fine. As you stated, the reason that these can be done in the same year is that the rollover into the 401k plan does not show up on Form 8606 in the year end balance for IRAs and therefore does not trigger pro rating of that pre tax amount. There also is no need to do any transfers before the rollover since there is only one TIRA now, fully pre tax and the entire account goes to the 401k.

If the 2011 contribution will not be made until 2012, the 2012 contribution could also be made at the same time and both converted in a single 2012 conversion.



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