Backdoor IRA, 401K/ 403B rollover problem, need advise

[MidWestInternist]

So I need some advise:

Wife has some money from her old job in 403B, which she rolled over in Trad IRA 2 years ago - big sum. We then contributed to her Non deductible IRA in 2015 and 2016 Max amt and let it form a basis of 11k in form 8606. Already contributed another 5500 for 2017, all the monies have increased somewhat with the market.

Now she is eligible for 401K at her job, and I think she take a distribution of non basis monies (Total Trad IRA - 11000-5500) and roll over to her employer 401K and do 11000+5500 rollver to Roth for backdoor without creating a taxable event.

Am I correct? Or am I missing some details? Does the sequence of events matter? Thanks for the input.

[Peds]

yes as long as move the existing tIRA into the new 401k then you can convert the nondeductible amount over to a rIRA. you need to have it moved by this calendar year i think.

[jfoxcpacfp]

• Of course, you'll first want to confirm that the new 401k accepts incoming rollovers.


• Next you'll have to segregate the growth on the nondeductible contributions ("basis") from the growth on the TIRA she rolled out from the 403b.


• The nondeductible contributions + growth will go into the backdoor Roth; you'll be taxed on the growth.


• The TIRA + growth will go into the 401k; you'll owe no tax. This is referred to as a "reverse rollover" if you want to Google it further.


• As long as you roll over the TIRA + growth before 12/31/17, you will not owe any pro-rata tax on the backdoor Roth conversion if you convert in 2017.


• If you don't roll over the TIRA in 2017, you'll want to wait until the year of r/o to convert to the backdoor Roth.

[MidWestInternist]

Thanks to both of you for the detailed and quick reply... Much appreciated..

[MidWestInternist]

Johanna, Thanks for the advise - However, on researching online, this link suggests a slightly different strategy:

http://fairmark.com/retirement/roth-accounts/roth-conversions/isolating-basis-for-roth-conversion/isolating-ira-basis/

Specifically : "You have to report this rollover on your tax return, but you don’t pay tax on any income until you take withdrawals from the employer plan. When you roll all the taxable money from the traditional IRA to an employer plan, the amount remaining in the traditional IRA is equal to its basis. That means you can convert the traditional IRA to a Roth without reporting any income."

 

Can you check once more. Otherwise I ll go with the method you have advised - It might cost more in taxes, but would give me peace of mind

 

Thanks

[DMFA]

MidWestInternist wrote:

Johanna, Thanks for the advise – However, on researching online, this link suggests a slightly different strategy:

http://fairmark.com/retirement/roth-accounts/roth-conversions/isolating-basis-for-roth-conversion/isolating-ira-basis/

Specifically : “You have to report this rollover on your tax return, but you don’t pay tax on any income until you take withdrawals from the employer plan. When you roll all the taxable money from the traditional IRA to an employer plan, the amount remaining in the traditional IRA is equal to its basis. That means you can convert the traditional IRA to a Roth without reporting any income.”

 

Can you check once more. Otherwise I ll go with the method you have advised – It might cost more in taxes, but would give me peace of mind

 

Thanks

Click to expand...

You're rolling over all growth and all deducted contributions into the 401(k) and converting all non-deducted basis into the Roth IRA, right? That should be totally untaxed.

I'd initiate that this week to make sure everything is done by 12/31.

[Dr. Mom]

In early 2017, I rolled all my pretax tIRA money to my solo 401k which isolated the basis in my tIRA to only my nondeductible contributions which I then rolled into a Roth IRA.  My pretax IRA money consisted of multiple rollovers from old plans as well as earnings on my nondeductible contributions.  Here is how my CPA and Schwab explained the IRS reporting to me.  Schwab would issue a 1099R-2 on the rollover to my Roth IRA which would be used with Form 8606 by my CPA.  The pretax money that rolled into my solo401k would generate a 1099R-G.  Although it does not create a taxable event, my CPA will enclose it with my 2017 taxes with a letter explaining what it is and why no taxes are owed.

If you can't get all this done by the end of 2017 best to wait until 2018.  All my accounts were with Schwab so it happened within a week or so.  If your accounts are in different locations, be careful about starting the process in December.  Hope it helps!  Best wishes!

[ENT Doc]

jfoxcpacfp wrote:

• Of course, you’ll first want to confirm that the new 401k accepts incoming rollovers.


• Next you’ll have to segregate the growth on the nondeductible contributions (“basis”) from the growth on the TIRA she rolled out from the 403b.


• The nondeductible contributions + growth will go into the backdoor Roth; you’ll be taxed on the growth.


• The TIRA + growth will go into the 401k; you’ll owe no tax. This is referred to as a “reverse rollover” if you want to Google it further.


• As long as you roll over the TIRA + growth before 12/31/17, you will not owe any pro-rata tax on the backdoor Roth conversion if you convert in 2017.


• If you don’t roll over the TIRA in 2017, you’ll want to wait until the year of r/o to convert to the backdoor Roth.

Click to expand...

Why does he have to separate out the growth?  Isn't all growth, whether from non-deductible contributions or 403b, taxed at ordinary income?  I recently did this and moved all non-deductible amounts (3 years) into my Roth (8606's filled out correctly) and once that had been put into the Roth I sent the rest (all taxed at ordinary income) into my i401k.  Was this not correct?

[jfoxcpacfp]

ENT Doc wrote:

jfoxcpacfp wrote:

• Of course, you’ll first want to confirm that the new 401k accepts incoming rollovers.


• Next you’ll have to segregate the growth on the nondeductible contributions (“basis”) from the growth on the TIRA she rolled out from the 403b.


• The nondeductible contributions + growth will go into the backdoor Roth; you’ll be taxed on the growth.


• The TIRA + growth will go into the 401k; you’ll owe no tax. This is referred to as a “reverse rollover” if you want to Google it further.


• As long as you roll over the TIRA + growth before 12/31/17, you will not owe any pro-rata tax on the backdoor Roth conversion if you convert in 2017.


• If you don’t roll over the TIRA in 2017, you’ll want to wait until the year of r/o to convert to the backdoor Roth.

Click to expand…

Why does he have to separate out the growth?  Isn’t all growth, whether from non-deductible contributions or 403b, taxed at ordinary income?  I recently did this and moved all non-deductible amounts (3 years) into my Roth (8606’s filled out correctly) and once that had been put into the Roth I sent the rest (all taxed at ordinary income) into my i401k.  Was this not correct?

Click to expand...

Yes, you are both correct - sorry I haven't been back to this thread. As long as the 401k accepts it, MidWestInternist can separate all of the growth on the n.d. IRA out and roll into the 401k. I apologize for not catching this when I wrote my original answer. I'm not exactly sure what you mean by "all taxed at ordinary income" because all income would be deferred using this method. Is that what you meant?

[ENT Doc]

jfoxcpacfp wrote:

ENT Doc wrote:

jfoxcpacfp wrote:

• Of course, you’ll first want to confirm that the new 401k accepts incoming rollovers.


• Next you’ll have to segregate the growth on the nondeductible contributions (“basis”) from the growth on the TIRA she rolled out from the 403b.


• The nondeductible contributions + growth will go into the backdoor Roth; you’ll be taxed on the growth.


• The TIRA + growth will go into the 401k; you’ll owe no tax. This is referred to as a “reverse rollover” if you want to Google it further.


• As long as you roll over the TIRA + growth before 12/31/17, you will not owe any pro-rata tax on the backdoor Roth conversion if you convert in 2017.


• If you don’t roll over the TIRA in 2017, you’ll want to wait until the year of r/o to convert to the backdoor Roth.

Click to expand…

Why does he have to separate out the growth?  Isn’t all growth, whether from non-deductible contributions or 403b, taxed at ordinary income?  I recently did this and moved all non-deductible amounts (3 years) into my Roth (8606’s filled out correctly) and once that had been put into the Roth I sent the rest (all taxed at ordinary income) into my i401k.  Was this not correct?

Click to expand…

Yes, you are both correct – sorry I haven’t been back to this thread. As long as the 401k accepts it, MidWestInternist can separate all of the growth on the n.d. IRA out and roll into the 401k. I apologize for not catching this when I wrote my original answer. I’m not exactly sure what you mean by “all taxed at ordinary income” because all income would be deferred using this method. Is that what you meant?

Click to expand...

Thanks for clarifying.  I meant that it was subject to ordinary income taxation (in the future), whereas the non-deductible-->Roth money is not.

[MidWestInternist]

Thanks everyone, It makes much more sense now, its easier to calculate, and saves me money as well...Thanks again