dmertz
Level 15

Retirement tax questions

Amounts rolled over from any kind of traditional IRA, including a SEP-IRA, are only permitted to be from pre-tax money in your traditional IRAs.  The basis in nondeductible traditional IRA contributions remains in your traditional IRAs.

 

In calculating the amount of your SEP-IRA that you are permitted to roll over to the 401(k), you must sum the values of all of your traditional IRAs, including the SEP-IRA, and subtract the amount of your basis in nondeductible traditional IRAs.  For example, if you have $20,000 in a SEP-IRA, $5,000 in another traditional IRA and your basis in nondeductible traditional IRA contributions is $10,000, the total in your traditional IRAs is $25,000 but only $15,000 is pre-tax and is the maximum that could be rolled over to the 401(k).

 

Note that the amount of your pre-tax money used in the calculation would be the sum of the amounts in your traditional IRAs at year end, not the amount in your traditional IRAs at the time that you do the rollover to the 401(k) earlier in the year, plus the amount rolled over to the 401(k).  You must be careful that your balance in traditional IRAs does not drop due to investment performance between the time you do the rollover and the time you do the Roth conversion that brings your year-end balance in traditional IRAs to zero, otherwise you will have impermissible rolled over part of your basis into the 401(k).  One way to ensure this is to move to a stable-value investment an amount equal to your basis that you will later convert to Roth, roll over the rest of your assets in traditional IRAs (or some smaller amount if you are willing to have some portion of your Roth conversion be taxable), then convert all remaining traditional IRA assets to Roth.