Roth conversion with TIRA and non-deductible TIRA

[fh2000]

DW and I retired early this year. We do not have Roth IRA. We have a mixture of 401K, rollover TIRA and non-deductible TIRA accounts. If I remember why we contributed to non-deductible TIRA accounts in the first place, it may be because we wanted to do backdoor conversion to Roth. But we did not do the conversion due to the complexity of Pro-Rata Basis Rule when converting to Roth. We then left these smaller accounts alone.

Anyway, we will likely start doing Roth conversion next year. My thinking is to convert TIRA accounts first, pay tax from cash accounts. When we exhaust those accounts, convert non-deductible TIRA accounts (with no pro-rata base issues). Pay taxes on the gains above the cost base per form 8606. Finally, roll 401K to TIRA and continue conversion, then pay the full tax.

Is my thinking accurate with these accounts?

 

[SecondCor521]

Unfortunately, you don't have a choice. The IRS will deem any traditional IRA conversions to be made on a pro-rata basis from all traditional IRA accounts (deductible + non-deductible), regardless of whether you have multiple accounts and have maintained segregation of the funds. Essentially, the IRS treats it as one large traditional IRA.

 

[fh2000]

Unfortunately, you don't have a choice. The IRS will deem any traditional IRA conversions to be made on a pro-rata basis from all traditional IRA accounts (deductible + non-deductible), regardless of whether you have multiple accounts and have maintained segregation of the funds. Essentially, the IRS treats it as one large traditional IRA.

This means, if my non-deductible TIRA cost base is $30,000. Regardless what my total value of TIRA and non-deductible TIRA is, if I convert 20% from the total each year, I will pay tax for 80% of the amount, and do this 5 years to exhaust all of the accounts. This is where the complexity is.

I don't think our old megacorp 401K administrator would allow converting old rollover TIRA into 401K anymore since we are retired? Otherwise, I could roll all TIRA accounts into it, and do Roth conversion from remaining non-deductible TIRA. No?

 

[FI_RElater]

yep... no choice--- pro rata


that's why the general suggestion is:
1) roll back any regular IRA into 401k
(this leaves you with only non-deductible IRA)
2) convert non-deductible IRA into Roth
(paying any tax from gains with taxable monies)
{if the amount that you want to convert exceeds the value of the non-deductible, leave the excess that you want to convert in the IRA.... complete the conversion of these values of the total of the non-deductible and the (now reduced) regular IRA, following the 8606 to determine the taxable amount}
3) after all non-Deductible is converted, then can move 401k money into IRA and from then forward
it's a simple case that all conversions are fully taxable

edit: saw you responded while I was typing
since you can't your IRA back to your 401k after retirement, now you're pretty much limited to pro-rata and following the 8606 (and now have to keep track of your respective amounts of non-deductible as you convert over the years)

 

[fh2000]

edit: saw you responded while I was typing
since you can't your IRA back to your 401k after retirement, now you're pretty much limited to pro-rata and following the 8606 (and now have to keep track of your respective amounts of non-deductible as you convert over the years)

Hopefully, TurboTax has a way to do the entries that calculate the prorated amounts and track each year. Otherwise, DW is good with Excel. Time to recruit her with this task for the next few years.

 

[cathy63]

Hopefully, TurboTax has a way to do the entries that calculate the prorated amounts and track each year. Otherwise, DW is good with Excel. Time to recruit her with this task for the next few years.

Yes, TurboTax will track and calculate this for you every year as long as you always import your previous year's file. Depending on how you do the conversions, you may not need to file form 8606 for each spouse each year, but TTax will still keep track of the amounts in the background for the next time you need to file it.

 

[SecondCor521]

I don't think our old megacorp 401K administrator would allow converting old rollover TIRA into 401K anymore since we are retired? Otherwise, I could roll all TIRA accounts into it, and do Roth conversion from remaining non-deductible TIRA. No?

Probably not. I think that's usually limited to current employees (and sometimes not even then).

But yeah, rolling the deductible IRAs into the 401(k)s and then Roth convert the non-deductible is the only way I know to avoid the pro-rata problem. Well, or convert all of the traditional IRAs completely to Roths, but you may not want to incur that much tax just to stop filling out Form 8606.

As others have said, start learning Form 8606. As far as how the pro-rata rule works, I believe it's just the ratio of your remaining/current basis (from your non-deductible IRAs) to the balance in all IRAs as of 12/31. But follow Form 8606 to be sure.

And as cathy63 alludes to, I think spouses are treated separately, so you and all your IRAs and basis and conversions would go on one Form 8606, and your wife and all of her IRAs and her basis and her conversions would go on a second Form 8606. You'd then combine the relevant totals from both 8606s back to the main form or schedule.

 

[kaneohe]

Hopefully, TurboTax has a way to do the entries that calculate the prorated amounts and track each year. Otherwise, DW is good with Excel. Time to recruit her with this task for the next few years.

I would suggest that you try filling out the paper form 8606 by hand. Thinking about the pro-rating is one thing and you can worry yourself sick just thinking about it. Actually doing it on the form just following the IRS instructions on the form leads you by the hand and probably , in the simple case, just involves a half dozen or so lines. You will probably find it simpler than you think.

When you finish the form you can compare your answer with this tool:
https://cotaxaide.org/tools/IRA Worksheet.html

 

[kaneohe]

This means, if my non-deductible TIRA cost base is $30,000. Regardless what my total value of TIRA and non-deductible TIRA is, if I convert 20% from the total each year, I will pay tax for 80% of the amount, and do this 5 years to exhaust all of the accounts. This is where the complexity is.

............................................

I guess I am not understanding this................two examples:
1) Suppose non-deductible basis is 30K. Total TIRA value is 30K.You convert
6K/yr. Your tax is 0.
2)Now total TIRA value is 1M dwarfing the basis. You convert 200K/yr. You will
pay tax on nearly 100% of that.

Where did the 80% number come from?

 

[gauss]

I would suggest that you try filling out the paper form 8606 by hand. Thinking about the pro-rating is one thing and you can worry yourself sick just thinking about it. Actually doing it on the form just following the IRS instructions on the form leads you by the hand and probably , in the simple case, just involves a half dozen or so lines. You will probably find it simpler than you think.

When you finish the form you can compare your answer with this tool:
https://cotaxaide.org/tools/IRA Worksheet.html

+1 to this.

It may be hard to give the correct answers to TurboTax if you are not 100% sure what they are asking for.

-gauss

 

[jebmke]

I would suggest that you try filling out the paper form 8606 by hand. Thinking about the pro-rating is one thing and you can worry yourself sick just thinking about it. Actually doing it on the form just following the IRS instructions on the form leads you by the hand and probably , in the simple case, just involves a half dozen or so lines. You will probably find it simpler than you think.

When you finish the form you can compare your answer with this tool:
https://cotaxaide.org/tools/IRA%20Worksheet.html

I always do a new-to-me form by hand before jumping into the software. Most software now shields the preparer from what is really going on at the form level. Often the questions in the "interview mode" for many tax software packages are vague and can lead one down a wrong path. That wrong path may produce a return that will go through but be wrong. A surprising number of people preparing returns -- including some TaxAide volunteers -- don't thoroughly review the final product.

 

[lordjust]

I just ran into this myself.. I decided to move my 403b from my old company into a tIRA to have access to better (more) funds. I decided I also wanted to backdoor roth some existing IRAs AFTER i did the rollover *sigh*... stupid pro-rata (or me... i blame pro-rata).

Any IRS implications (move one time rule?) with moving the 403b to my personal tIRA and now moving it to my new companies 401k to allow for the roth conversions (tax savings) at least till after dec 31? What about moving it back out of the 401k after im done with my conversions? I so wish i would have planned this better.

 

[kaneohe]

I just ran into this myself.. I decided to move my 403b from my old company into a tIRA to have access to better (more) funds. I decided I also wanted to backdoor roth some existing IRAs AFTER i did the rollover *sigh*... stupid pro-rata (or me... i blame pro-rata).

Any IRS implications (move one time rule?) with moving the 403b to my personal tIRA and now moving it to my new companies 401k to allow for the roth conversions (tax savings) at least till after dec 31? What about moving it back out of the 401k after im done with my conversions? I so wish i would have planned this better.

don't believe there are restrictions on moving back to 401K. You might want
to ask your new company HR if they have restrictions about moving it out if
you are still working there. For the real answer, you might want to ask your question at fairmark.com in the retirement forum......look for response by
Alan S.

 

[Spock]

Maybe I'm sideways on this, but I'd consider roth conversions from the 401K first.
It all depends on how much you got in there and your ages... you might fill your tax brackets until RMDs with just 401K->Roth IRAs.

Side note: why convert 401K->tIRA->Roth IRA? Its simpler to just go straight to the Roth IRA.

 

[Gotadimple]

Side note: why convert 401K->tIRA->Roth IRA? Its simpler to just go straight to the Roth IRA.

If the OP wants to delaying taxes on the 401k on conversion to Roth directly, then the 401K to tIRA is a way to avoid taxes - temporarily. But in the end taxes are still due, and it might be cheaper to pay now rather than later as the investments in the tIRA continue to grow.

-Rita

 

[lordjust]

don't believe there are restrictions on moving back to 401K. You might want
to ask your new company HR if they have restrictions about moving it out if
you are still working there. For the real answer, you might want to ask your question at fairmark.com in the retirement forum......look for response by
Alan S.

much appreciated!!