Guide to In-Plan Roth Conversions

[AJC]

I am looking for a well-written guide to in-plan Roth conversions, assuming there is such a thing available. All comments/suggestions appreciated.

[JOH]

Are you looking for the technical aspect of how to report it or just a general overview of what it is?

[AJC]

JOH, I have read about Roth conversions over the years and believe I know "what" it is. I would like to see something that shows examples and details of the processes as well as what is and is not allowed and why. I have never helped a client with one.

A self-employed 64-year-old prospect contacts me and asks, "Hey, I have an SEP and some other IRAs totaling $1,500,000 that I would like to first like to roll into a solo 401(k) plan and then convert as much as possible to Roth via an in-plan Roth conversion. I have $36,000 in basis that I want to leave in the IRAs. I also want to begin contributing the maximum amount annually in the 401(k) plan and later use a backdoor Roth. Can you help me?" Well, I would like to help him, and in the process of doing so, expand my knowledge.

After reading about Roth conversions, it seems to me that converting pre-tax funds to after-tax funds - converting a traditional IRA to a Roth IRA, might be more beneficial for the prospect because of the recharacterization that is currently available for a Roth IRA conversion that is not available for an in-plan conversion. But could there be a reason why it would be more beneficial for the prospect to process an in-plan conversion, as he has asked, rather than process a Roth IRA conversion? Just another question for me. 

I did notice that there are a number of articles on this website (benefitslik.com) that refer to Roth IRAs, Roth 401(k)s, and Roth conversions. However, I wonder if there is current material available that covers all aspects of Roth conversions that I can rely upon to begin to build my knowledge on the subject.

[JOH]

AJC- couple of things. If I recall, as of 2018, you cannot recharacterize a Roth Conversion back to a Traditional IRA. You can only recharacterize Roth Contributions into a Traditional IRA (someone can correct me if I'm wrong).  Additional, when you do a Roth Conversion (Traditional IRA to Roth IRA) you can't designate the basis. In your example, client has $1,500,000 or which $36,000 is basis, client converts $1,464,000 into a Roth and leaves $36,000 then .024 of the $1,464,000 or $35,136 is considered after-tax and of the remaining $36,000 in the traditional IRA, $864 of it is considered basis. IRS doesn't let you earmark the conversion but it has to pro-rata (someone can correct me on this as well b/c I'm about 95% sure of this one). 

As to the backdoor Roth, if he establishes solo(K), why does he want to do a in-plan conversion when he can just make Designated Roth Contributions into the Solo(k). Unless someone else is seeing a reason for your client to make a pre-tax contribution and then do an IRR, I don't see a point. And any IRR creates its own 5 year rule, so not sure if I see a point in the IRR, especially at your client's age. 

Hope this helps.

[Bri]

I would suspect the rest of the backdoor Roth conversion would be for the 25% profit sharing contribution.