401k loan offset to Roth IRA

[cris1000]

Hello,

I left my employer and the offset my 401k loan before I rolled the remaining balance into my 401k at my new employer.

I understand that if I do a “60 day rollover” of the offset amount into a traditional IRA, I can avoid the taxes and penalty for early withdrawal. I would also like However, I regularly perform rollovers from my traditional IRA to my Roth IRA (back door Roth). I also understand that once you mix pretax and taxes dollars in your traditional IRA, you will get taxes even on your backdoor Roth rollovers and I would like to avoid this.

If I rollover the loan offset to my traditional IRA then roll that over to the Roth IRA, will I still be taxed? If I will be taxed, will I still be able to avoid the 10% early withdrawal penalty?

[Opus 17]

First, lets make sure that what we are talking about is you coming up with the money from someplace else, to cover the amount of the loan.

I believe the SECURE act extended the deadline to make a rollover to cover the offset to April 15 on the next year, not just 60 days, assuming it is a "qualified offset."  If you deposit the corresponding amount of money into an IRA, that is your "rollover" that puts the money back into tax-deferred retirement savings, and you don't pay income tax or the 10% penalty for early withdrawal.  This is not "mixing pre-tax and after tax dollars" in the IRA, as long as you complete the rollover by the deadline and you tell the IRA in advance, that this is a rollover and not a regular deposit.

Any Roth conversions you do are entirely separate.  Roth conversions are subject to regular income tax but no penalties.  If you rollover the offset funds into an IRA, and then later do a conversion from the IRA to a Roth IRA, that is a taxable conversion just like any other and the original source of the money doesn't matter.  They are two separate events. 

You have an "offset distribution" from your 401k, you will get a 1099-R from the plan administrator that must be reported on your tax return.  After entering the 1099, Turbotax will ask what you did with the money, and one of the choices will be that you rolled it over into another qualifying account.

[dmertz]

The deadline to roll over the offset distribution is the due date of the tax return including extensions.

The offset distribution can be rolled directly to a Roth IRA, which would be taxable, or it can be non-taxably rolled over to a traditional IRA and then taxably converted to Roth.  As long as you end up with $0 in traditional IRAs at year-end after having converted everything to Roth, which appears to be what you are suggesting, mixing the pre-tax funds from an offset rollover to a traditional IRA and nondeductible traditional IRA contributions is not a problem.