Rollover tIRA to Roth conversion with contributions

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
Topic Author
mswnj2012
Posts: 1
Joined: Mon Jan 14, 2019 2:41 pm

Rollover tIRA to Roth conversion with contributions

Post by mswnj2012 » Mon Jan 14, 2019 2:51 pm

Hello

Been lurking on these forums for years but now am in the position that I feel it would be best to share my unique circumstance to reach out to the experts for advice/insights.

In 2016 I rolled over a previous employer's 401k into a rollover tIRA which equated to about 10k. Since that time, I have been making the maximum yearly contributions with after-tax dollars of $5,500 for 2016, 2017, and 2018 - resulting in the account reaching almost 30k in total (albeit mixed from the pre-tax 401k rollover amount and the yearly contributions.

Due to the fact that I am early in my working career and anticipate higher earnings down the road, I converted the total $30k rollover tIRA to a roth ira in 2018. I would have contributed to the Roth Independently, but exceed the yearly income earnings to allow me to do so upfront.

My question - now that we are approaching tax season - is, have I complicated the process by converting both the rollover total and contributions from the tIRA together? Would it been have advised that I done some sort of partial conversion?

Just trying to get a grasp on what I can anticipate in terms of a tax bill from the IRS as a result of this conversion.
Still believe it was the right decision and that I will be thanking myself down the road, however, getting a bit of anxiety when trying to forecast the amount I need to set aside to address this impending tax bill..

Any thoughts are greatly appreciated.

magicrat
Posts: 586
Joined: Sat Nov 29, 2014 7:04 pm

Re: Rollover tIRA to Roth conversion with contributions

Post by magicrat » Mon Jan 14, 2019 3:03 pm

It looks like you made $16.5k in non-deductible contributions ($5.5k x 3). Therefore you will report $13.5k ($30k-$16.5k) as income for 2018.

mark1623
Posts: 91
Joined: Mon Jan 14, 2019 2:33 pm

Re: Rollover tIRA to Roth conversion with contributions

Post by mark1623 » Mon Jan 14, 2019 3:05 pm

The conversion is taxed pro-rata between pre-tax and after-tax money, so there really isn't any benefit from doing a partial conversion. If 13.5/30 (45.%) is pre-tax money (i.e. 401k contributions and earnings) then 45 cents of every dollar you convert was going to get taxed either way.

MisterMister
Posts: 171
Joined: Thu Nov 01, 2018 9:50 pm

Re: Rollover tIRA to Roth conversion with contributions

Post by MisterMister » Mon Jan 14, 2019 9:16 pm

mark1623 wrote:
Mon Jan 14, 2019 3:05 pm
The conversion is taxed pro-rata between pre-tax and after-tax money, so there really isn't any benefit from doing a partial conversion. If 13.5/30 (45.%) is pre-tax money (i.e. 401k contributions and earnings) then 45 cents of every dollar you convert was going to get taxed either way.

EDIT: My understanding, as written below, was completely incorrect. Either ignore this post or see Katietsu's response to it.

I am also trying to sort this out. Maybe a few questions from me and illustrations will also help the OP.

Based on what you have said and my understanding, there are two cases:
1. Full conversion of all money. Here you pay tax on all of the pretax contributions as income.
2. Partial conversion. Here you pay tax on the same percentage of the converted money as if you had converted all of it (45% in your example).

In my case, I plan to do a conversion also. The money was mostly invested a very long time ago. So in one fund, my cost basis (tax basis) was $15,000 which had grown to $200,000. So if this were my only investment, I could convert $200,000 and only pay tax on $15,000. Am I correct?

If so, then in the OPs case, we know the percentage is likely more than the 45% you mention because some chunk of that 30K was from a rolled over 401K. So that will have to be factored in as well.

I also have several rollover IRAs that are ancient. One came from a self-employment tax-sheltered fund from 35 years back. One is more recent. I have no idea how I will determine tax basis for all of this.
Last edited by MisterMister on Mon Jan 14, 2019 9:57 pm, edited 1 time in total.

Katietsu
Posts: 1775
Joined: Sun Sep 22, 2013 1:48 am

Re: Rollover tIRA to Roth conversion with contributions

Post by Katietsu » Mon Jan 14, 2019 9:39 pm

MisterMister wrote:
Mon Jan 14, 2019 9:16 pm
mark1623 wrote:
Mon Jan 14, 2019 3:05 pm
The conversion is taxed pro-rata between pre-tax and after-tax money, so there really isn't any benefit from doing a partial conversion. If 13.5/30 (45.%) is pre-tax money (i.e. 401k contributions and earnings) then 45 cents of every dollar you convert was going to get taxed either way.
I am also trying to sort this out. Maybe a few questions from me and illustrations will also help the OP.

Based on what you have said and my understanding, there are two cases:
1. Full conversion of all money. Here you pay tax on all of the pretax contributions as income.
2. Partial conversion. Here you pay tax on the same percentage of the converted money as if you had converted all of it (45% in your example).

In my case, I plan to do a conversion also. The money was mostly invested a very long time ago. So in one fund, my cost basis (tax basis) was $15,000 which had grown to $200,000. So if this were my only investment, I could convert $200,000 and only pay tax on $15,000. Am I correct?

If so, then in the OPs case, we know the percentage is likely more than the 45% you mention because some chunk of that 30K was from a rolled over 401K. So that will have to be factored in as well.

I also have several rollover IRAs that are ancient. One came from a self-employment tax-sheltered fund from 35 years back. One is more recent. I have no idea how I will determine tax basis for all of this.
I think you have this very wrong. You only have a basis in a traditional IRA if you have non deductible contributions. All “pretax” contributions AND all earnings fall into the taxable category when you convert. Additionally, all traditional IRA’s are considered even if you only convert a piece of one IRA.

It sounds like you might have zero basis and all the conversions would be taxable. Did you ever complete a form 8606 or make after tax contributions to a 401k ? Most people have not done either and those who have usually know it.

MisterMister
Posts: 171
Joined: Thu Nov 01, 2018 9:50 pm

Re: Rollover tIRA to Roth conversion with contributions

Post by MisterMister » Mon Jan 14, 2019 9:51 pm

Katietsu wrote:
Mon Jan 14, 2019 9:39 pm
MisterMister wrote:
Mon Jan 14, 2019 9:16 pm
mark1623 wrote:
Mon Jan 14, 2019 3:05 pm
The conversion is taxed pro-rata between pre-tax and after-tax money, so there really isn't any benefit from doing a partial conversion. If 13.5/30 (45.%) is pre-tax money (i.e. 401k contributions and earnings) then 45 cents of every dollar you convert was going to get taxed either way.
I am also trying to sort this out. Maybe a few questions from me and illustrations will also help the OP.

Based on what you have said and my understanding, there are two cases:
1. Full conversion of all money. Here you pay tax on all of the pretax contributions as income.
2. Partial conversion. Here you pay tax on the same percentage of the converted money as if you had converted all of it (45% in your example).

In my case, I plan to do a conversion also. The money was mostly invested a very long time ago. So in one fund, my cost basis (tax basis) was $15,000 which had grown to $200,000. So if this were my only investment, I could convert $200,000 and only pay tax on $15,000. Am I correct?

If so, then in the OPs case, we know the percentage is likely more than the 45% you mention because some chunk of that 30K was from a rolled over 401K. So that will have to be factored in as well.

I also have several rollover IRAs that are ancient. One came from a self-employment tax-sheltered fund from 35 years back. One is more recent. I have no idea how I will determine tax basis for all of this.
I think you have this very wrong. You only have a basis in a traditional IRA if you have non deductible contributions. All “pretax” contributions AND all earnings fall into the taxable category when you convert. Additionally, all traditional IRA’s are considered even if you only convert a piece of one IRA.

It sounds like you might have zero basis and all the conversions would be taxable. Did you ever complete a form 8606 or make after tax contributions to a 401k ? Most people have not done either and those who have usually know it.
OK, now I understand. It was too good to be true to expect all that growth to be tax free! What was I thinking? I have not made any after tax contributions to my IRA.

Post Reply