Rolling Traditional IRA INTO a 403(b)?

[nh_ets]

Hello,

I am new to posting but am an avid reader. I have a traditional IRA that was funded ($21000) with a rollover from a less than stellar 401(k) years ago (Travellers). An additional $6500, not including 2010 contributions, was added as non-deductible contributions between 2008 and 2009. I would like to roll this IRA to a Roth, but see that I would have to pay income tax on the $21,000. I read I can use a conduit IRA to roll the $21,000 into my current 403(b), or perhaps an old 403(b) no longer getting contributions, and then just roll the non-deductible contributions into the Roth. The tax code states in form 590 page 23:

"IRA as a holding account (conduit IRA) for rollovers to other eligible plans. If you receive an eligible rollover distribution from your employer's plan, you can roll over part or all of it into one or more conduit IRAs. You can later roll over those assets into a new employer's plan. You can use a traditional IRA as a conduit IRA. You can roll over part or all of the conduit IRA to a qualified plan, even if you make regular contributions to it or add funds from sources other than your employer's plan. However, if you make regular contributions to the conduit IRA or add funds from other sources, the qualified plan into which you move funds will not be eligible for any optional tax treatment for which it might have otherwise qualified."

SO, I think this is OK to do, right? My question is this - what are the optional tax treatments that could risk putting my large active 403(b) or older small 403(b) in jeopardy? It seems vague, and I found nothing that elaborates on it.

Or I am totally off base with this whole idea?

Thank you!

[Default User BR]

SO, I think this is OK to do, right? My question is this - what are the optional tax treatments that could risk putting my large active 403(b) or older small 403(b) in jeopardy? It seems vague, and I found nothing that elaborates on it.

Yes, provided the plan you want accepts such rollovers, it should be fine. See the wiki for more information about conduit IRAs.

http://www.bogleheads.org/wiki/IRA_Rollovers_and_Transfers#Rollover_.28Conduit.29_IRA



Brian

[nh_ets]

Thank you! One other question - when I do roll to the 403(b) do I just roll the initial principal from the 401(k) (via the IRA) or do I also try to roll any dividends at the same time? Alternatively, I can only roll the initial principal and keep the dividends in the traditional IRA?

Thanks

[ddb]

Thank you! One other question - when I do roll to the 403(b) do I just roll the initial principal from the 401(k) (via the IRA) or do I also try to roll any dividends at the same time? Alternatively, I can only roll the initial principal and keep the dividends in the traditional IRA?

Thanks

You should probably transfer everything except the non-deductible portion. The goal would be to have just $6,500 (the non-deductible amount) remaining in a Traditional IRA, which you could then convert to a Roth with no tax due (assuming no other Traditional IRA assets).

- DDB

[JW Nearly Retired]

I am new to posting but am an avid reader. I have a traditional IRA that was funded ($21000) with a rollover from a less than stellar 401(k) years ago (Travellers). An additional $6500, not including 2010 contributions, was added as non-deductible contributions between 2008 and 2009. I would like to roll this IRA to a Roth, but see that I would have to pay income tax on the $21,000.

I'm not sure if you mean the $21k is all the money in the IRA or just the original amount rolled into it. You will have to pay income tax on all the money you roll except the $6500. All earnings too, not just the original principal. The only distinction between $ in the TIRA is between the non-deductible contribution amount and the rest of it. If your purpose is to get this $6500 into a Roth without paying any taxes on it you have to first isolate it as the only $ left in the TIRA. Because IRS says any money you roll out of a TIRA must come first from the before-tax portion, what you are doing is way to do this.

IMO, it's certainly a good idea providing that your 403(b) is an OK one in terms of cost.
JW

[nh_ets]

Thanks again,

Yes I would keep the 6500 in post-tax contribution in the Trad IRA to roll into the Roth. The overall value right now is about $30k, but contributions were $33000 (401 rollover ($22000) plus the $6500 (plus an addition $5000 for 2010 contribution), so perhaps there are no dividends to roll over anyway? In fact a loss perhaps - in that case what do I do?

[nh_ets]

OK - AND 1 MORE QUESTION

Looking at page 41 of IRS form 590, it seems that if I roll the 401(k) $$ from the IRA into the new 403(b) in the same year I roll the non-deductible out to the ROth, I may have to show the balance than includes BOTH on this form - could that set me up to have to pay tax on some of the rolled out money as it is based on a proportion. If so should I roll the 401(k) part now and wait until 2011 to do the roth conversion for the rest, so my end of year balance only shows funds from the non-deductible part? Or am I reading into this too much and I would be able to do this all in 2010 without tax?

Ugh!

[Default User BR]

OK - AND 1 MORE QUESTION

Looking at page 41 of IRS form 590, it seems that if I roll the 401(k) $$ from the IRA into the new 403(b) in the same year I roll the non-deductible out to the ROth, I may have to show the balance than includes BOTH on this form - could that set me up to have to pay tax on some of the rolled out money as it is based on a proportion. If so should I roll the 401(k) part now and wait until 2011 to do the roth conversion for the rest, so my end of year balance only shows funds from the non-deductible part? Or am I reading into this too much and I would be able to do this all in 2010 without tax?

You're referring to this:

http://www.irs.gov/publications/p590/ch01.html#en_US_publink1000230850

That's the "pro-rata rule" for distributions. That isn't applicable in this case. See:

http://www.irs.gov/publications/p590/ch01.html#en_US_publink1000230568



Brian

[nh_ets]

Thanks for the tip. It does say this:

Ordinarily, when you have basis in your IRAs, any distribution is considered to include both nontaxable and taxable amounts. Without a special rule, the nontaxable portion of such a distribution could not be rolled over. However, a special rule treats a distribution you roll over into an eligible retirement plan as including only otherwise taxable amounts if the amount you either leave in your IRAs or do not roll over is at least equal to your basis. The effect of this special rule is to make the amount in your traditional IRAs that you can roll over to an eligible retirement plan as large as possible.

So in my scenario - my account is worth $30000, my basis is 11500, and the amount I want to roll over, which equals the amount from the original employer plan is 22151. If I roll all 22151, that leaves me with 7849 left in the IRA. Is that a problem since it is less than the basis (there is a loss)? No I need to somehow preserve 11500 in the IRA after I roll out the employer plan funds (which would mean only rolling out 18500)?

Or I cross my fingers that between now and 12/31/10 my value increase to over 11500, and then do the Roth transfer then!!

[Default User BR]

So in my scenario - my account is worth $30000, my basis is 11500, and the amount I want to roll over, which equals the amount from the original employer plan is 22151. If I roll all 22151, that leaves me with 7849 left in the IRA. Is that a problem since it is less than the basis (there is a loss)? No I need to somehow preserve 11500 in the IRA after I roll out the employer plan funds (which would mean only rolling out 18500).

Why would you do that? There's no requirement that a rollover to a qualified plan equal the value from a previous rollover. Just roll the amount needed to leave only the basis behind, then convert that to Roth. You're done, with no tax due.



Brian

[nh_ets]

No, that does make sense - the trick will be the timing as the market value will change daily? I guess better to roll the full basis into the roth and reduce the rollover to the 403(b) considering I don't have enough at this point to do 100%, and don't want to trigger a tax.

Can I do them both this year, or should I roll the roth part in 2011?

[JW Nearly Retired]

So in my scenario - my account is worth $30000, my basis is 11500, and the amount I want to roll over, which equals the amount from the original employer plan is 22151. If I roll all 22151, that leaves me with 7849 left in the IRA. Is that a problem since it is less than the basis (there is a loss)? No I need to somehow preserve 11500 in the IRA after I roll out the employer plan funds (which would mean only rolling out 18500).

I don't get what you are talking about but I think you are still confused. The 22151 dollar amount you rolled into this account has no significance whatsoever. Neither does the fact that there is a gain or loss. There is no need to know the "basis" of a pre-tax TIRA. If it has no non-deductible contributions in it when you retire and take money out, you pay tax on the gross $ you take out and only that. You and the IRS are partner investors. If the account loses money you both lose equally. If there are non-deductible contributions then all you need to know is the original amount of them, your 6500 + 5000. You seem to think there is something more to it.

Suggest you get a copy of IRS form 8606 and dry run the tax consequences of this planned maneuver so you will get it right. I think you will find you can roll all but 11500 to the 403b and then convert that remaining balance to a Roth.
JW

[nh_ets]

No I get it now - thanks. As long as I can keep 11500 basis in the TIRA to roll into the Roth I am set - everything else goes to the 403(b) (even if it is less than the original amount). The trick will be how to get exactly 11500 to remain as I have to roll the 403(b) dollars out first, and the value changes daily, right?

[Default User BR]

The trick will be how to get exactly 11500 to remain as I have to roll the 403(b) dollars out first, and the value changes daily, right?

Switch to a cash equivalent first, or be prepared for a variance.



Brian

[nh_ets]

Cash equivalent? How do I do that (and what is it)? Sorry - clearly not my specialty!

[Default User BR]

Cash equivalent? How do I do that (and what is it)? Sorry - clearly not my specialty!

A money market fund or the brokerage cash sweep. Neither will go down in value, and aren't likely to go up much in the short term.


Brian

[nh_ets]

THANKS AGAIN!

So one last question. I realized that of the 11500 basis I will transfer to the roth, 1500 was re-characterized from a roth to the TIRA when my income changed and I mistakenly put in the roth. On that 1500, I made about $15 interest in the short time it was there. Is that $15 part of the basis I need to roll BACK to the roth now (I assume the 1500 part is)?

Thanks

[Easy Rhino]

not addressing the direct question, but is the new 403b a good one? A great deal of them stink, you might be better off keeping an IRA?

[nh_ets]

Pretty good - T Rowe Price with:
FIDELITY INTERNL DISCOVERY
JP MORGAN MID CAP VALUE INSTL
SMALL-CAP STOCK FUND
GROWTH STOCK FUND
INTERNATIONAL DISCOVERY FUND
QUANT FUNDS EMER MARKETS INST
SOUND SHORE FUND
VANGUARD INST INDEX

among other choices I didn't go for

[nh_ets]

So one last question. I realized that of the 11500 basis I will transfer to the roth, 1500 was re-characterized from a roth to the TIRA when my income changed and I mistakenly put in the roth. On that 1500, I made about $15 interest in the short time it was there. Is that $15 part of the basis I need to roll BACK to the roth now (I assume the 1500 part is)?

[Default User BR]

So one last question. I realized that of the 11500 basis I will transfer to the roth, 1500 was re-characterized from a roth to the TIRA when my income changed and I mistakenly put in the roth. On that 1500, I made about $15 interest in the short time it was there. Is that $15 part of the basis I need to roll BACK to the roth now (I assume the 1500 part is)?

Earnings are not basis. You should probably convert that to Roth as well and pay tax on it. Otherwise you have to do a pro-rata calculation.



Brian

[nh_ets]

Or roll it into the 403(b) or is that not allowed?

[xerty24]

So in my scenario - my account is worth $30000, my basis is 11500, and the amount I want to roll over, which equals the amount from the original employer plan is 22151. If I roll all 22151, that leaves me with 7849 left in the IRA. Is that a problem since it is less than the basis (there is a loss)? No I need to somehow preserve 11500 in the IRA after I roll out the employer plan funds (which would mean only rolling out 18500).

Why would you do that? There's no requirement that a rollover to a qualified plan equal the value from a previous rollover. Just roll the amount needed to leave only the basis behind, then convert that to Roth. You're done, with no tax due.

It's actually a pretty bad area of the law, as in, I don't think Congress really meant what they wrote. Leaving aside the Roth conversion, let's suppose you just roll the non-basis portion into the 403 plan and leave the rest. Now if you lose money on the basis portion, you may have an invalid conversion determined after the fact. Surely this is not what they meant and I don't think anyone actually pays attention to this, but I'm pretty sure that's what the actual law says.

[Default User BR]

Or roll it into the 403(b) or is that not allowed?

That depends on your plan. Many qualified plans allow it.



Brian

[Default User BR]

It's actually a pretty bad area of the law, as in, I don't think Congress really meant what they wrote. Leaving aside the Roth conversion, let's suppose you just roll the non-basis portion into the 403 plan and leave the rest. Now if you lose money on the basis portion, you may have an invalid conversion determined after the fact. Surely this is not what they meant and I don't think anyone actually pays attention to this, but I'm pretty sure that's what the actual law says.

Why do you think that? Can you quote the particular law regarding this "invalid conversion"?



Brian

[nh_ets]

Are we sure the pro-rata rule does not apply in this case? I was about to pull the trigger until Vanguard said that I would likely owe tax as I can't allocate funds in the way proposed from the one account (co-mingled) and deposit the basis in the other without pay some prorated portion of tax?

I also saw something about a 60 day time limit in the 590? Does that apply here too?

Just when I though I was set....

[Default User BR]

Are we sure the pro-rata rule does not apply in this case?

Review the link I posted. There is a discussion of rollovers from IRAs to qualified plans, with specific information regarding basis.



Brian

[nh_ets]

Hi,
I have read it 100 times now but not get the prorata part in my case. I was good until Vanguard scared me, but they might have it wrong? From what you are saying this does not apply if only basis (and some recharacterization earnings of $8) go to the Roth, with all else going to the 403(b)? No other earings as account at a loss.

Sorry - I am thick - not my area of expertise, but I do appreciate your help!!

[Default User BR]

Hi,
I have read it 100 times now but not get the prorata part in my case. I was good until Vanguard scared me, but they might have it wrong? From what you are saying this does not apply if only basis (and some recharacterization earnings of $8) go to the Roth, with all else going to the 403(b)? No other earings as account at a loss.

You have an IRA with some basis (non-deductible contributions) and some taxable. If you do a rollover from an IRA to a qualified plan (TSP, 401(k), 403(b), 457) then only taxable money can move. That is an exception to the pro-rata rule. This is discussed in the link I gave you under the section labeled "Tax treatment of a rollover from a traditional IRA to an eligible retirement plan other than an IRA."

I don't know how it could clearer, or what your exact uncertainty is. You do a rollover of the (IRA balance - the basis) to the qualified plan, then do a conversion of the remainder, which will be entirely basis. Vanguard is right that if you do the conversion it will be pro-rata unless you roll over the taxable portion. Do that FIRST before you consider the conversion to simplify things and to make sure there's no hitch in doing the rollover.



Brian

[nh_ets]

Thanks again - what about that 60 day clause? This is well over 60 days. Does that apply?

[Default User BR]

Thanks again - what about that 60 day clause? This is well over 60 days. Does that apply?

That applies to all rollovers. You'll have to be more specific in your question.



Brian

[nh_ets]

In the 590 document it mentions this:

http://www.irs.gov/publications/p590/ch ... 1000230568

I initially move the money from the old 401(k) into the IRA over 60 days ago (more like 2 years ago), where it has sat until now. It is at a loss, if that matters, but didn't know if because it is over 60 days I can't move it?

[Default User BR]

In the 590 document it mentions this:

http://www.irs.gov/publications/p590/ch ... 1000230568

I initially move the money from the old 401(k) into the IRA over 60 days ago (more like 2 years ago), where it has sat until now. It is at a loss, if that matters, but didn't know if because it is over 60 days I can't move it?

The 60-day rule has to do with completing a rollover. Your rollover is done. You want to initiate a new one.



Brian

[nh_ets]

"Vanguard is right that if you do the conversion it will be pro-rata unless you roll over the taxable portion. Do that FIRST before you consider the conversion to simplify things and to make sure there's no hitch in doing the rollover. "


So that means the rollover taxable part (my former 401(k) part) will not incur taxes either, right?

[the intruder]

OK - AND 1 MORE QUESTION

Looking at page 41 of IRS form 590, it seems that if I roll the 401(k) $$ from the IRA into the new 403(b) in the same year I roll the non-deductible out to the ROth, I may have to show the balance than includes BOTH on this form - could that set me up to have to pay tax on some of the rolled out money as it is based on a proportion. If so should I roll the 401(k) part now and wait until 2011 to do the roth conversion for the rest, so my end of year balance only shows funds from the non-deductible part? Or am I reading into this too much and I would be able to do this all in 2010 without tax?

You're referring to this:

http://www.irs.gov/publications/p590/ch01.html#en_US_publink1000230850

That's the "pro-rata rule" for distributions. That isn't applicable in this case. See:

http://www.irs.gov/publications/p590/ch01.html#en_US_publink1000230568



Brian

I dont think the above citations answer the question of whther the pro rata rule applies.

There is a clear distinction in the IRC and the IRS publications between a distribution and a tax free rollover which is included for the purpose of the pro rata rule in worksheet 1-5. While a rollover from an IRA to a qualfied plan/403b plan is a tax free transfer, for the following reasons a rollover is also a distribution which must be included when calculating the amount of the pre tax distriubution which is included on line 5 of Worksheet 1-5 on P 41 of Pub 590:

1. The instructions for Box 1 of the 1009R states that a rollover from an IRA to a qualified plan is reported as a distribution in box 1. The taxable amount is reported separately in box 2a.

2. The rollover is also reported as a distribution on line 15a of the 1040 form even though it is included as 0 taxable income on line 15b.

3. Pub 590 P 38 specifically states the distinction between a distibuton and a taxable event: " Exceptions to distributions from traditional IRAs being taxable in the year you receive them are Rollovers..."

4. IRC 408(d)(3)(H)(ii) which contains the exception to the pro rata rule language you cited in Pub 590 states that the amount rolled over to a qualified plan is a distribution from the IRA.

The only way for the rollover of the pre tax money from an IRA to a qualified plan/403b plan to be excluded as a distribution subject to the pro rata rule for IRAs on worksheet 1-5 is to transfer the pre tax money in 2010 and then move the AT money to a Roth in 2011.

Any taxpayer contemplating a rollover of pre tax funds to a qualifIed or 403b plan and then converting the AT amounts to a Roth IRA in the same year should consult a tax advisor.

[nh_ets]

Who know this would be so interesting or tricky! I don't see any reason I can't wait to roll to the Roth in 2011 and do the employer-sponsored plan piece this year, as there are essentially no earnings going to the Roth to pay tax on, and all contributions that will be rolled to the Roth are non-deductible (post-tax) contributions. So, I don't need the special 2010 spread of tax treatment since I should have nearly 0 tax (save tax on about $8). If I do this over the 2 years, will that make things tax free for both pieces?

[nh_ets]

I also found this:

"Reporting rollovers from IRAs. Report any rollover from one traditional IRA to the same or another traditional IRA on Form 1040, lines 15a and 15b; Form 1040A, lines 11a and 11b; or Form 1040NR, lines 16a and 16b.
Enter the total amount of the distribution on Form 1040, line 15a; Form 1040A, line 11a; or Form 1040NR, line 16a. If the total amount on Form 1040, line 15a; Form 1040A, line 11a; or Form 1040NR, line 16a, was rolled over, enter zero on Form 1040, line 15b; Form 1040A, line 11b; or Form 1040NR, line 16b. If the total distribution was not rolled over, enter the taxable portion of the part that was not rolled over on Form 1040, line 15b; Form 1040A, line 11b; or Form 1040NR, line 16b. Put “Rollover” next to line 15b, Form 1040; line 11b, Form 1040A; or line 16b, Form 1040NR. See the forms' instructions.
If you rolled over the distribution into a qualified plan (other than an IRA) or you make the rollover in 2010, attach a statement explaining what you did."

That second paragraph sounds closer to what I am hoping to do, so maybe I don't fill out the form as you suggested?

[Default User BR]

1. The instructions for Box 1 of the 1009R states that a rollover from an IRA to a qualified plan is reported as a distribution in box 1. The taxable amount is reported separately in box 2a.

You can NOT roll non-taxable money from an IRA to qualified plan. The rules specifically forbid this. Furthermore, Pub 590 make clear that a special rule is in place specifically saying that pro-rata for such a rollover does not apply. This is to make the rollover as large as possible.

Kinds of rollovers from a traditional IRA. You may be able to roll over, tax free, a distribution from your traditional IRA into a qualified plan. These plans include the Federal Thrift Savings Fund (for federal employees), deferred compensation plans of state or local governments (section 457 plans), and tax-sheltered annuity plans (section 403(b) plans). The part of the distribution that you can roll over is the part that would otherwise be taxable (includible in your income). Qualified plans may, but are not required to, accept such rollovers.

Tax treatment of a rollover from a traditional IRA to an eligible retirement plan other than an IRA. Ordinarily, when you have basis in your IRAs, any distribution is considered to include both nontaxable and taxable amounts. Without a special rule, the nontaxable portion of such a distribution could not be rolled over. However, a special rule treats a distribution you roll over into an eligible retirement plan as including only otherwise taxable amounts if the amount you either leave in your IRAs or do not roll over is at least equal to your basis. The effect of this special rule is to make the amount in your traditional IRAs that you can roll over to an eligible retirement plan as large as possible.

Brian

[the intruder]

1. The instructions for Box 1 of the 1009R states that a rollover from an IRA to a qualified plan is reported as a distribution in box 1. The taxable amount is reported separately in box 2a.

You can NOT roll non-taxable money from an IRA to qualified plan. The rules specifically forbid this. Furthermore, Pub 590 make clear that a special rule is in place specifically saying that pro-rata for such a rollover does not apply. This is to make the rollover as large as possible.

Kinds of rollovers from a traditional IRA. You may be able to roll over, tax free, a distribution from your traditional IRA into a qualified plan. These plans include the Federal Thrift Savings Fund (for federal employees), deferred compensation plans of state or local governments (section 457 plans), and tax-sheltered annuity plans (section 403(b) plans). The part of the distribution that you can roll over is the part that would otherwise be taxable (includible in your income). Qualified plans may, but are not required to, accept such rollovers.

Tax treatment of a rollover from a traditional IRA to an eligible retirement plan other than an IRA. Ordinarily, when you have basis in your IRAs, any distribution is considered to include both nontaxable and taxable amounts. Without a special rule, the nontaxable portion of such a distribution could not be rolled over. However, a special rule treats a distribution you roll over into an eligible retirement plan as including only otherwise taxable amounts if the amount you either leave in your IRAs or do not roll over is at least equal to your basis. The effect of this special rule is to make the amount in your traditional IRAs that you can roll over to an eligible retirement plan as large as possible.

Brian

Where did I say that the AT money is being rolled over to a qual plan? I was merely stating that the pre tax amount rolled over to a Qualified plan is reported as a distribution in box 1 the 1099R. What I was trying to do was note that there is a difference in IRS termonology between a "distribution " and a "taxable amount" that is a non taxable rollover for income tax purposes. While a rollover of pre tax funds to a qualified plan is not taxable it still appears from the IRS instructions for the 1099R, the 1040 and tax law to be a "distribution" from the IRA for the purpose of the pro rata rule on Roth conversions from an IRA. As I noted at the end of my post the AT funds will be converted from the IRA to the Roth IRA (not the qualified plan) which is permissible under the IRC.

I dont disagree that the purpose of IRC 408(d)(3)(H)(ii) is make the pre tax amount rolled over as large as possible but that does not change the fact that it appears to be a distribution from the IRA to be reported on worksheet 1-5.

You can check with a tax advisor to get a definitive answer.

[Default User BR]

Where did I say that the AT money is being rolled over to a qual plan? I was merely stating that the pre tax amount rolled over to a Qualified plan is reported as a distribution in box 1 the 1099R. What I was trying to do was note that there is a difference in IRS termonology between a "distribution " and a "taxable amount" that is a non taxable rollover for income tax purposes. While a rollover of pre tax funds to a qualified plan is not taxable it still appears from the IRS instructions for the 1099R, the 1040 and tax law to be a "distribution" from the IRA for the purpose of the pro rata rule on Roth conversions from an IRA. As I noted at the end of my post the AT funds will be converted from the IRA to the Roth IRA (not the qualified plan) which is permissible under the IRC.

I dont disagree that the purpose of IRC 408(d)(3)(H)(ii) is make the pre tax amount rolled over as large as possible but that does not change the fact that it appears to be a distribution from the IRA to be reported on worksheet 1-5.

Why not present a small example of how you think it is supposed to work? What you say doesn't make any sense. There can't be pro-rata if there's nothing but basis left. The taxable amount in the IRA come 12/31 is $0, so all the pro-rata calculations made on Form 8606 end up 100% non-taxable.


Brian