Traditional IRA After Tax contributions, conversion to Roth and tax implications & Trad 401k Convert to Trad IRA timing

Forum|Forum|2 years ago
January 29, 2024
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I have a question about converting After-Tax contributions in a Traditional IRA to a Roth and what the tax implications are.

I'm 47, and my traditional IRA is worth roughly 130,000. About 100,000 of that is AFTER-tax contributions and I have filed and recorded that basis on the 8606 tax form each year.

If I convert that account to my Roth IRA, do I only pay tax on the 30,000 of money that is not part of the basis (I think it's all gains)? How does that get handled? (I think this is just mark yes I contributed, then process the 1099-R)

I'm asking this as I recently left my job, and want to convert my significant Traditional 401k into my Traditional IRA, but at that point, the after-tax basis of the account will only be about 10% and therefore I believe I would be subject to much more taxes on any conversion.

Can I do both of these transactions in a single tax year and receive the benefit? e.g., first, convert the current traditional IRA account to Roth and then roll over my traditional 401k to the traditional IRA and have conversion still only taxed at the ~30,000? Or does this have to happen in a second tax year? If in a single year, is there a time that I need to wait between the transactions?

Thank you

Not A Product Question

Best answer by dmertz

After doing the Roth conversion, you can't roll the 401(k) over to a traditional IRA in the same year as the Roth conversion without causing most of the Roth conversion to be taxable and most of your basis in nondeductible traditional IRA contributions to remain in your traditional IRAs to be applied to future distributions. The relative timing of the transactions does not matter. For the calculation of the taxable amount, all of these transactions are treated as if they occurred on December 31. You'll need to do the Roth conversion in one calendar year and make the distribution from the 401(k) for the rollover to a traditional IRA in a later calendar year.

dmertzAnswer

Employee

IRAQuesitonAuthor

Thank You.

Opus 17

Employee

Because conversions can't be retroactive (like contributions sometimes can) you will need to do the conversion in 2024 and wait until after 1/1/25 to rollover the 401k to an IRA. You need to end 2024 with a zero balance in traditional IRAs for this to work the way you want it to.