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Rollover of Traditional IRA including Nondeductible Contributions


austin3515

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Is there a rule that says that an IRA including nondeductible contributions cannot be rolled over to a 401(k) plan?  Ordinarily  I would say forget it but in this case it is the owner who wants to consolidate.

If the answer was no, wouldn't that be indicated on this chart?  I don't see any mention of any such restriction.

https://www.irs.gov/pub/irs-tege/rollover_chart.pdf

Austin Powers, CPA, QPA, ERPA

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Without looking to the statute or regulations for an answer, I did find that our plan document contains this language in the section describing what rollover contributions may be accepted by the plan:

Quote

 Any rollover contribution of the portion of a distribution from an individual retirement
account or annuity described in Code sections 408(a) or 408(b) that is eligible to be rolled over and would
otherwise be includible in gross income.

The amount of the IRA attributable to non-deductible contributions is basis, and therefore would not be otherwise includable in gross income, and as such would not be accepted as a rollover by a plan that uses this language. See if your document has something similar.

Free advice is worth what you paid for it. Do not rely on the information provided in this post for any purpose, including (but not limited to): tax planning, compliance with ERISA or the IRC, investing or other forms of fortune-telling, bird identification, relationship advice, or spiritual guidance.

Corey B. Zeller, MSEA, CPC, QPA, QKA
Preferred Pension Planning Corp.
corey@pppc.co

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But does everyone concur that the individual may do a rollover of the portion that, but for the rollover, would be includible in gross income?

And is it okay to leave behind in the IRA the nondeductible-contributions amount?

Peter Gulia PC

Fiduciary Guidance Counsel

Philadelphia, Pennsylvania

215-732-1552

Peter@FiduciaryGuidanceCounsel.com

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I just read a really cool suggestion - do a Roth covnersion - roll the basis to a Roth IRA and the gains portion to a pre-tax IRA.  I dont follow the mechanics but if someon else does and can it explain it I would be grateful!

https://www.lordabbett.com/en-us/financial-advisor/insights/retirement-planning/when-the-reverse-makes-sense--benefits-of-a-reverse-rollover.html#:~:text=A regular rollover is when,your employer or plan administrator.

EXAMPLE: Ben has a $100,00 traditional IRA of which $30,000 consists of basis (after-tax funds), and the remaining $70,000 is pre-tax. Since a 401(k) can only accept pre-tax funds, the basis can’t be rolled over and must remain in his IRA. After Ben rolls over the $70,000 to his 401(k), what’s left in his IRA ($30,000) is all after-tax dollars, which can now be converted to a Roth IRA, free of taxes. Why? Because taxes had previously been paid on these funds, there is no tax bill for the Roth conversion.

Austin Powers, CPA, QPA, ERPA

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21 minutes ago, Belgarath said:

IRC 408(d)(3)(A)(ii)

Excellent thanks!

 

(3) Rollover contribution

An amount is described in this paragraph as a rollover contribution if it meets the requirements of subparagraphs (A) and (B).

(A) In general

Paragraph (1) [Which states ALL distributions from IRAs are taxable] does not apply to any amount paid or distributed out of an individual retirement account or individual retirement annuity to the individual for whose benefit the account or annuity is maintained if—

(i) the entire amount received (including money and any other property) is paid into an individual retirement account or individual retirement annuity (other than an endowment contract) for the benefit of such individual not later than the 60th day after the day on which he receives the payment or distribution; or

(ii) the entire amount received (including money and any other property) is paid into an eligible retirement plan for the benefit of such individual not later than the 60th day after the date on which the payment or distribution is received, except that the maximum amount which may be paid into such plan may not exceed the portion of the amount received which is includible in gross income (determined without regard to this paragraph).

Austin Powers, CPA, QPA, ERPA

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Hi Austin - yes, this can be done. I think the mechanics are relatively simple IF the client has only 1 IRA with basis. Your example lays it out pretty clearly. However, I'd want to do a little digging on this, because my recollection (and I don't mess with this stuff with any frequency) is that if there is more than one IRA with basis, then ALL of the taxable amounts in ALL of the non-Roth IRA's have to be rolled into the plan in order to have only non-taxable basis left in the IRA's. Otherwise there's a whole crappy pro-rata thing.

But caveat emptor - this ain't my thing - I never worry about it since the 401(k) plans can only allow the otherwise taxable amount. The rest ain't my problem!!!

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The only thing I would warn you on is to make sure that the client doesn't have any other Traditional IRAs because Conversion are calculated pro-rata. So if client has a Traditional IRA at custodian A with balance of $10,000 (all deductible) and another Traditional IRA at custodian B with a balance of $10,000 (all non-deductible) and does a Roth Conversion at custodian B for $10,000, the remaining balance of $10,000 at custodian A with be $5,000 deductible and $5,000 non deductible. unfortunately, you can't designate what money source you are converting.

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