Untangling a Trad IRA

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GuySmiley
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Untangling a Trad IRA

Post by GuySmiley » Fri Aug 10, 2018 6:17 am

I have a traditional IRA which is mostly a 401k rollover (~500K) but also includes one year of non-deductible contribution from 2016 ($5500). I understand that by moving all but the non-deductible part back to a 401k then it would allow me to cleanly do a backdoor Roth contribution, otherwise the tax situation gets complicated.

My question is: which should I do first? Rollover to 401k the big part, or convert to Roth the small part? Both will happen this year. I am concerned if I do the rollover first and leave the 5500 balance to convert that fees or interest will alter the 5500 before I convert. I guess another way to ask this question is if the "complicated tax situation" of the mixed contribution sources gets triggered at the time of Roth conversion, or does it only matter how it looks at the end of the year?

tenkuky
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Re: Untangling a Trad IRA

Post by tenkuky » Fri Aug 10, 2018 12:07 pm

I would do the rollover first and leave a little more that 5500 in the tIRA to do the conversion. Your taxable amount will be negligible and ensure a zero balance in the tIRA by year end.
If you are selling all holdings and keeping in cash, shouldn't have wild swings in amount to convert. Would only get tricky if you went below the 5500.
Re. tax situation, I don't know the answer, but Fidelity advised me to complete the rollover before the Roth conversion. I did exactly that.

NotWhoYouThink
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Re: Untangling a Trad IRA

Post by NotWhoYouThink » Fri Aug 10, 2018 12:25 pm

You have to do the rollover first, because otherwise any conversion would have to be pro-rated.

kaneohe
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Re: Untangling a Trad IRA

Post by kaneohe » Fri Aug 10, 2018 5:56 pm

I don't think the order matters but you do have to make sure that you don't put any basis into the 401K. This can be tricky since the value in the TIRA may vary w/ market changes. Some suggest that you do the Roth conversion version first to be sure this conversion takes all of the basis into the Roth which guarantees that none of it gets to the 401K.
http://fairmark.com/retirement/roth-acc ... ira-basis/

"Fortunately the IRS takes this more practical approach in Publication 590-A (2016 ed. p. 21):

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."

I believe I have seen Alan S. say you could do the rollover to 401K and Roth conversion in any order.....of course having difficulty finding those links today.

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Duckie
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Re: Untangling a Trad IRA

Post by Duckie » Fri Aug 10, 2018 7:46 pm

GuySmiley, welcome to the forum.
GuySmiley wrote:which should I do first? Rollover to 401k the big part, or convert to Roth the small part? Both will happen this year. I am concerned if I do the rollover first and leave the 5500 balance to convert that fees or interest will alter the 5500 before I convert. I guess another way to ask this question is if the "complicated tax situation" of the mixed contribution sources gets triggered at the time of Roth conversion, or does it only matter how it looks at the end of the year?
There is no pro-rata issue as long as both happen before 12/31, but I still recommend you do the rollover first. Because conversions can no longer be recharacterized, it would be more prudent to make sure the rollover happens properly without any glitches before doing the conversion. Put the $5500 in something like a money market fund so there will be no losses and minimal gains.

GuySmiley
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Re: Untangling a Trad IRA

Post by GuySmiley » Fri Aug 10, 2018 9:27 pm

Thanks all for the advice. I will likely rollover after the first of the month (after interest is paid) leaving $5600. There might be a $95 transfer fee and not sure from which part it would be deducted so I'd rather err on the side of paying a little extra tax upon Roth conversion once the majority of the funds have left the account.

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Earl Lemongrab
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Re: Untangling a Trad IRA

Post by Earl Lemongrab » Sat Aug 11, 2018 3:48 pm

kaneohe wrote:
Fri Aug 10, 2018 5:56 pm
I don't think the order matters but you do have to make sure that you don't put any basis into the 401K. This can be tricky since the value in the TIRA may vary w/ market changes. Some suggest that you do the Roth conversion version first to be sure this conversion takes all of the basis into the Roth which guarantees that none of it gets to the 401K.
That used to be common advice. The new tax laws removed the ability to recharacterize conversions. If you convert first and there is a hitch in the rollover so it doesn't get done by year's end you'll get hit with pro-rata and no way to fix it.
This week's fortune cookie: "Your financial life will be secure and beneficial." So I got that going for me, which is nice.

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Earl Lemongrab
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Re: Untangling a Trad IRA

Post by Earl Lemongrab » Sat Aug 11, 2018 3:49 pm

GuySmiley wrote:
Fri Aug 10, 2018 9:27 pm
Thanks all for the advice. I will likely rollover after the first of the month (after interest is paid) leaving $5600. There might be a $95 transfer fee and not sure from which part it would be deducted so I'd rather err on the side of paying a little extra tax upon Roth conversion once the majority of the funds have left the account.
Most custodians don't charge a fee to roll over to a qualified plan.
This week's fortune cookie: "Your financial life will be secure and beneficial." So I got that going for me, which is nice.

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Earl Lemongrab
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Re: Untangling a Trad IRA

Post by Earl Lemongrab » Sat Aug 11, 2018 3:59 pm

NotWhoYouThink wrote:
Fri Aug 10, 2018 12:25 pm
You have to do the rollover first, because otherwise any conversion would have to be pro-rated.
That's not accurate. Pro-rata is based on the value of IRAs on 12/31.
This week's fortune cookie: "Your financial life will be secure and beneficial." So I got that going for me, which is nice.

retiredjg
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Re: Untangling a Trad IRA

Post by retiredjg » Sat Aug 11, 2018 4:27 pm

Earl Lemongrab wrote:
Sat Aug 11, 2018 3:59 pm
NotWhoYouThink wrote:
Fri Aug 10, 2018 12:25 pm
You have to do the rollover first, because otherwise any conversion would have to be pro-rated.
That's not accurate. Pro-rata is based on the value of IRAs on 12/31.
I think both of those are correct in their own way. The first is what the rules say. The second is how the rules are applied.

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