Traditional IRA Rollovers

[CurtisStevens]

Here is how I understand it if you want to rollover non-deductible traditional IRA contributions into a Roth account for high-income earners. This works fine without penalties if you do not own any IRA accounts with deductible contributions in them. I have an IRA that consists of SEP contributions and non-deductible IRA contributions over the yrs. To my understanding, I can't simply open up a new IRA and contribute to the IRA and then convert that to a ROTH without paying tax on a %. I read you can convert the IRA to a 401K, which the IRS doesn't include those balances in computing your penalty when rolling over your traditional IRA to Roth. So how do you rollover your traditional IRA to a 401K when part of ira balance consists of nondeductible contributions? And if you can, then what is left would be the nondeductible IRA contributions and you rollover all of it to a roth without any extra tax, but gets to come out tax-free in retirement. It's starting to sound like I can't take advantage of this loophole.

[gloriah5200]

When you distribute or rollover monies from a tradtitional IRA, Form 8606 allocates the non-deductible IRA basis to all traditional IRA balances so that in order to use all the non-deductible IRA basis you would have to liquidate or roll-over all traditional IRA account balances.

[CurtisStevens]

Are you basically saying I can't just rollover the SEP contributions, it's all or nothing? Am I correct, that I can't just open up a 2nd IRA account, contribute to that and just rollover those funds to a Roth?

Curtis

[gloriah5200]

When you rollover part of a contribution to a traditional IRA account that has a nondeductible IRA contribution basis, then that portion will be allocated a portion of the nondeductible IRA basis from the traditional IRA account but not all of the nondeductible traditional IRA basis unless the entire account is liquidated.

[CurtisStevens]

How does one go about rolling over their pre-tax contributions from their traditional IRA to their 401K plan? I have an individual 401K plan for my business. All of my accounts are with etrade. That way everything left in my IRA would be after-tax contributions and I can convert those to my roth account. I have 5 different accounts in etrade.... I'm trying find a guide online and can't.

[dmertz]

Under these circumstances, gloriahh5200's reply is incorrect.  Because the tax code prohibits your basis in nondeductible traditional IRA contributions from being rolled over to a qualified retirement plan like a 401(k), the tax code specifies that such a rollover consists only of the pre-tax money in your IRAs.  (Rolling over to the qualified retirement plan more than your pre-tax IRA money result in an impermissible rollover of some amount of basis in nondeductible traditional IRA contributions, potentially subjecting the qualified retirement plan to disqualification if not corrected.)  By rolling over the pre-tax money to the qualified retirement plan, the basis in nondeductible traditional IRAs is left to be converted to Roth unencumbered.

[CurtisStevens]

Yes, I understand all of that. All pre-tax contributions must go to a 401K plan for example. How do you go about doing that and knowing how much growth is from those contributions and which growth goes with the after-tax contributions? Do you just rollover everything but the after-tax basis, assuming all the growth was on the pre-tax money to keep it simple? I'm waiting to hear back from etrade to see if they handle this.

[dmertz]

All growth in a traditional IRA is pre-tax.

The main thing that you need to be careful of is that the value in the traditional IRA doesn't drop below the basis amount after the pre-tax portion is moved out, otherwise some of what was assumed to be pre-tax when moved to the qualified retirement plan transforms into basis that was impermissible to have rolled over.  It probably makes sense to put an amount equal to the basis into a stable-value fund before rolling the rest over to the qualified retirement plan, then convert the stable-value fund to Roth, ensuring that you can convert to Roth no less than the amount of your basis in nondeductible traditional IRA contributions.

Doing the rollover to the qualified retirement plan first ensures that that rollover can be completed before you commit to the irrevocable Roth conversion.