Rolling my 401k to a trad-IRA and then converting to a Roth-IRA. Do I pay the taxes during conversion or when filing for 2018? Can I use the 401k $$ to pay those taxes?

[macuser_22 · Accepted solution]

Those are two separate events.  The 401(k) to IRA rollover will be reported on a 1099-R and will not be taxable.

The Traditional IRA to Roth conversion is a taxable event and will also be reported on a 1099-R.  If you do either, or both, in 2018 then the 1099-R's will be sent by Jan. 31, 2019 and go on your 2018 tax return.

You can either have tax withheld from the conversion distribution or pay the tax with separate funds.   If you have other funds to pay the tax then that is usually better since you can then convert all of the tax deferred 401(k) funds and  not lose part by paying tax with tax deferred money which itself is taxable when removed from the 401(k) or IRA.

You asked if you can use the 401(k) to pay the tax.   You can rollover only a portion of the 401(k) and take some in cash (if the plan allows a portion rollover).   If you are under age 59 1/2, however, there would be a 10% penalty in the part taken in cash unless you qualify for an exception such as having left the service of the employer.    Traditional IRA to Roth conversions are not subject to the 10% penalty.

[Critter]

One more addition ... if you do a complete roll from the 401K to the IRA the you can convert it to the
ROTH as you wish ... it doesn't need to be done all in one tax year ... by making partial conversions over a period of multiple tax years you may save quite a bit in taxes ... do some research to see how the conversion will effect you tax wise.

[holleman86]

Very helpful. Is there a rate schedule for figuring out how much would be taxed given the amount?

[macuser_22]

It is taxed as ordinary income which add to your AGI.   After deductions and tax credits (if any) becomes your taxable income.   The rate that you pay depends on your tax bracket.   A large distribution might push you into a higher tax bracket.   Some people find it better to make a non-taxable rollover of the entire 401(k) and then convert it gradually over several years when they expect to be in a lower tax bracket and not push them in to a higher bracket by converting all at once.

2018 Income Tax Brackets
Rate   Individuals           Married Filing Jointly
12%   $9,526 to $38,700        $19,051 to $77,400
22%   $38,701 to $82,50        $77,401 to $165,000
24%   $82,501 to $157,500 $165,001 to $315,000
32% $157,501 to $200,000 $315,001 to $400,000

[holleman86]

Exaclty what I'm looking for, thank you!

[Tushi_Florida]

How to report 401(k) rollover to traditional IRA and then partial Roth conversion on new 1040 Line 4a/b for 2018 tax year? Previously it was split between 15a/b and 16a/b.

[macuser_22]

@tushi_florida -  IRA distributions were on line 15a/b and all others (pensions, employer plans, insurance, etc) on line 16a/b.    They are no longer separating the IRA's on a separate line.   They all get entered on line4a/b.   I guess they found no value to separate IRA's out since lines 15b and 16b just got added together anyway and the breakdown of the line 15a and 16a are detailed on the 1099-R forms that the IRS receives.