Rollover to employer retirement plan and conversion to Roth for taxpayer over 701/2 | Ed Slott and Company, LLC

Rollover to employer retirement plan and conversion to Roth for taxpayer over 701/2

Taxpayer L, a teacher is over 701/2 years old and has been taking RMD every year. He has a 403(b) plan through his current employer. L also has a IRA account that he set up prior to his employment with the educational institution. Fair market value of his IRA as of 1/1/2018 was $150,000 with a basis of $10,000. L has taken 2018 RMD of say $ 5,000. Fair market value of his account as of today after taking the RMD is $ 140,000. He now wants to rollover the taxable portion of IRA to his employer’s 403(b) plan and convert the basis to a Roth IRA.
1.Is the RMD of $5,000 taken out in 2018 all taxable or does it have a non-taxable portion of $344 (5,000 * $10,000/145,000), although the value of account after the rollover and conversion as of December 31,2018 will be zero?
2.Can he rollover the taxable portion of $130,344 [$140,000 – (10,000-344)] to 403(b) and convert the remaining $9,656 basis to Roth all in 2018 without paying additional tax on the Roth conversion?
3.Will he have to first rollover the taxable portion to 403(b) and then wait next to do the Roth conversion?
4. If he converts his basis Roth in 2019, is he required to take RMD out in 2019 before conversion?

  • The taxable portion of both the 2018 and the Roth conversion will be the same as they are both 2018 distributions. If the rollover of the current TIRA value less 5000 is completed before year end, both the RMD and 5000 conversion will be non taxable. If the rollover to 403b is not completed this year, both the RMD and any conversion will be mostly taxable using the same % for both.  This can be confirmed by completing a trial Form 8606 which will be used to report both the RMD and conversion.
  • Put another way, the taxable amount of the RMD is not determined until year end on Form 8606. Because conversions can no longer be recharacterized, the 403b rollover should be completed before the conversion.

If the Roth conversion is done in 2019, and rollover to 403(b) is done in 2018, what is the best way in determining that correct basis (just the post tax contribution) is left for conversion after the rollover?

Form 8606 for 2018 will show the remaining IRA basis at the end of 2018 on line 14. The RMD for 2018 would be nn taxable with some basis left for the 2019 RMD and conversion. Since there will be a small balance on 12/31/2018, there will be a very small 2019 RMD that must be done prior to a 2019 conversion.  Best to complete the conversion in 2018 right after the 403 rollover is accepted. That will eliminate the small 2019 RMD and any earnings that might occur in the IRA after the 403 b rollover is done that would be taxable in the conversion.

Thank you so much for the response. I have one follow-up question. If the RMD for 2018 was $15,000 instead of $5,000, can the total basis of $10,000 be used to offset the $15,000 RMD upto basis  and rollover the remaining balance in the IRA to 403(b) in 2018 without a need for Roth conversion? Should form  line 6 of Form 8606 be zero if this applies?

Yes, line 6 will be 0 as long as there is no TIRA balance at year end.  However, the taxable amount for the RMD (and conversion, if any) will be the amount in excess of the 10,000 basis. Therefore, an RMD of 15,000 would use up all the basis plus 5,000 of the taxable amount. The entire remaining IRA balance would be pre tax and could be rolled over to the 403b. 


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