Moving IRA pre-tax money to 401k (How do I leave just the non-deductible basis behind?)
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Moving IRA pre-tax money to 401k (How do I leave just the non-deductible basis behind?)
Hello Bogleheads! Long time lurker here. I need some help with the logistics of moving my Schwab pre-tax IRA balance to my employee sponsored 401k plan. My plan will accept pre-tax funds. The complicating factor is that I need to leave exactly the $5000 post-tax basis behind. The transfer form gives options of transfering all or a percentage of the assets. How do I avoid ending up with a few extra pennies left behind caused by an interest payment? I've talked to representatives at both Schwab and my 401k company and have not received helpful guidance. My best idea is to put all the assets into cash/money market, then make the calculation and hope for the best. Does anyone have experience doing this? Thanks in Advance!
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Re: Moving IRA pre-tax money to 401k (How do I leave just the non-deductible basis behind?)
The consequences of leaving a trivial amount of pre-tax behind is trivial.
The conversion to cash should work but if that means you are out of the market, the consequences could be significant.
The conversion to cash should work but if that means you are out of the market, the consequences could be significant.
Don't trust me, look it up. https://www.irs.gov/forms-instructions-and-publications
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Re: Moving IRA pre-tax money to 401k (How do I leave just the non-deductible basis behind?)
I had a similar dilemma a few years ago. I just converted the after-tax amount to Roth then transfered the remaining balance to my 401k (completed before 12/31).GumSprings wrote: ↑Tue Oct 26, 2021 5:31 pm Hello Bogleheads! Long time lurker here. I need some help with the logistics of moving my Schwab pre-tax IRA balance to my employee sponsored 401k plan. My plan will accept pre-tax funds. The complicating factor is that I need to leave exactly the $5000 post-tax basis behind. The transfer form gives options of transfering all or a percentage of the assets. How do I avoid ending up with a few extra pennies left behind caused by an interest payment? I've talked to representatives at both Schwab and my 401k company and have not received helpful guidance. My best idea is to put all the assets into cash/money market, then make the calculation and hope for the best. Does anyone have experience doing this? Thanks in Advance!
Re: Moving IRA pre-tax money to 401k (How do I leave just the non-deductible basis behind?)
If you leave a few pennies then when you do a Roth conversion of the rest of the IRA, you will add a few pennies of taxable income to your tax return.
Re: Moving IRA pre-tax money to 401k (How do I leave just the non-deductible basis behind?)
You can't just convert the after tax amount. Proration drags along a part of the pre-tax. If the pre-tax amount is trivial, just convert the entire amount and pay the tax on a trivial amount.anon_investor wrote: ↑Tue Oct 26, 2021 5:41 pmI had a similar dilemma a few years ago. I just converted the after-tax amount to Roth then transfered the remaining balance to my 401k (completed before 12/31).GumSprings wrote: ↑Tue Oct 26, 2021 5:31 pm Hello Bogleheads! Long time lurker here. I need some help with the logistics of moving my Schwab pre-tax IRA balance to my employee sponsored 401k plan. My plan will accept pre-tax funds. The complicating factor is that I need to leave exactly the $5000 post-tax basis behind. The transfer form gives options of transfering all or a percentage of the assets. How do I avoid ending up with a few extra pennies left behind caused by an interest payment? I've talked to representatives at both Schwab and my 401k company and have not received helpful guidance. My best idea is to put all the assets into cash/money market, then make the calculation and hope for the best. Does anyone have experience doing this? Thanks in Advance!
Don't trust me, look it up. https://www.irs.gov/forms-instructions-and-publications
Re: Moving IRA pre-tax money to 401k (How do I leave just the non-deductible basis behind?)
As long as you can empty the account by 12/31 of the same year, there won't be a pro rata amount. Hence the transfer of pre tax to 401k.jebmke wrote: ↑Tue Oct 26, 2021 5:48 pmYou can't just convert the after tax amount. Proration drags along a part of the pre-tax. If the pre-tax amount is trivial, just convert the entire amount and pay the tax on a trivial amount.anon_investor wrote: ↑Tue Oct 26, 2021 5:41 pmI had a similar dilemma a few years ago. I just converted the after-tax amount to Roth then transfered the remaining balance to my 401k (completed before 12/31).GumSprings wrote: ↑Tue Oct 26, 2021 5:31 pm Hello Bogleheads! Long time lurker here. I need some help with the logistics of moving my Schwab pre-tax IRA balance to my employee sponsored 401k plan. My plan will accept pre-tax funds. The complicating factor is that I need to leave exactly the $5000 post-tax basis behind. The transfer form gives options of transfering all or a percentage of the assets. How do I avoid ending up with a few extra pennies left behind caused by an interest payment? I've talked to representatives at both Schwab and my 401k company and have not received helpful guidance. My best idea is to put all the assets into cash/money market, then make the calculation and hope for the best. Does anyone have experience doing this? Thanks in Advance!
- anon_investor
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Re: Moving IRA pre-tax money to 401k (How do I leave just the non-deductible basis behind?)
Technically there is no pro rata tax applied if there is no pre-tax balance in any IRAs on 12/31 of the calendar year of the conversion. Meaning the entire remaining pre-tax balance was rolled over to the 401k. Any growth of the after-tax amount (before a Roth conversion) is pre-tax.jebmke wrote: ↑Tue Oct 26, 2021 5:48 pmYou can't just convert the after tax amount. Proration drags along a part of the pre-tax. If the pre-tax amount is trivial, just convert the entire amount and pay the tax on a trivial amount.anon_investor wrote: ↑Tue Oct 26, 2021 5:41 pmI had a similar dilemma a few years ago. I just converted the after-tax amount to Roth then transfered the remaining balance to my 401k (completed before 12/31).GumSprings wrote: ↑Tue Oct 26, 2021 5:31 pm Hello Bogleheads! Long time lurker here. I need some help with the logistics of moving my Schwab pre-tax IRA balance to my employee sponsored 401k plan. My plan will accept pre-tax funds. The complicating factor is that I need to leave exactly the $5000 post-tax basis behind. The transfer form gives options of transfering all or a percentage of the assets. How do I avoid ending up with a few extra pennies left behind caused by an interest payment? I've talked to representatives at both Schwab and my 401k company and have not received helpful guidance. My best idea is to put all the assets into cash/money market, then make the calculation and hope for the best. Does anyone have experience doing this? Thanks in Advance!
Re: Moving IRA pre-tax money to 401k (How do I leave just the non-deductible basis behind?)
When I did this a few years ago I wasn't completely sure I would really, truly be able to get my pre tax money into the 401k. That meant that I wanted to move the pre tax money before doing the conversion. I also wanted to ensure that all of my after tax money stayed in the IRA, but not more than that.
My solution: I opened up a new IRA at the same custodian and moved just the after tax m̶o̶n̶e̶y̶ amount into that IRA. My after tax amount wasn't large compared to my overall portfolio so I wasn't too worried about being out of market for a few days. Then I moved the entire original IRA account, which was at that point all pre tax money no matter how much it grew or shrunk, into the 401k.
As soon as the big IRA to 401k move was really, truly done I converted the after tax money into a Roth. It had gained a few pennies that were taxed at the end of the year.
My solution: I opened up a new IRA at the same custodian and moved just the after tax m̶o̶n̶e̶y̶ amount into that IRA. My after tax amount wasn't large compared to my overall portfolio so I wasn't too worried about being out of market for a few days. Then I moved the entire original IRA account, which was at that point all pre tax money no matter how much it grew or shrunk, into the 401k.
As soon as the big IRA to 401k move was really, truly done I converted the after tax money into a Roth. It had gained a few pennies that were taxed at the end of the year.
Last edited by mtbill on Tue Oct 26, 2021 6:30 pm, edited 1 time in total.
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Re: Moving IRA pre-tax money to 401k (How do I leave just the non-deductible basis behind?)
Like with the conversion method you can't just move the after tax to a new account but what you do is move an amount equal to the after tax then roll the remaining ira to the qualified plan and then convert the other ira.
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Re: Moving IRA pre-tax money to 401k (How do I leave just the non-deductible basis behind?)
Thank you all for your helpful replies. To answer some of the questions that have been brought up. My goal in doing this is to convert the after-tax money to a Roth and start doing backdoor Roth contributions. My pre-tax total is approximately $365,000 so I definitely don't want to pay taxes on that now. The account is 100% Total Bond Market so I'm not concerned about being out of the market.
MrJedi.. Are you suggesting that if a trivial amount is to left behind in my IRA after Roth conversion of $5000 then I would simply leave the original IRA sitting there with a tiny balance until retirement?
anon_invester.. What you suggest seems easy enough. Is this how you did it? 1) open a new Roth IRA. 2) convert $5000 into the new IRA. 3). Move remaining pre-tax dollars to my 401k before the end of the year. I will talk to Schwab about this option. It may be getting late in the year to start this process.
jebmke.. You brought up the pro rata rule. I must admit that the pro rata rule confuses me. I have been concerned about messing this process up.
mtbill.. It seems like you took a similar but slightly different approach to anon_invester by opening a new IRA and moving the after-tax basis there before moving you pre-tax to your 401k.
MrJedi.. Are you suggesting that if a trivial amount is to left behind in my IRA after Roth conversion of $5000 then I would simply leave the original IRA sitting there with a tiny balance until retirement?
anon_invester.. What you suggest seems easy enough. Is this how you did it? 1) open a new Roth IRA. 2) convert $5000 into the new IRA. 3). Move remaining pre-tax dollars to my 401k before the end of the year. I will talk to Schwab about this option. It may be getting late in the year to start this process.
jebmke.. You brought up the pro rata rule. I must admit that the pro rata rule confuses me. I have been concerned about messing this process up.
mtbill.. It seems like you took a similar but slightly different approach to anon_invester by opening a new IRA and moving the after-tax basis there before moving you pre-tax to your 401k.
Striving for Simplicity
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Re: Moving IRA pre-tax money to 401k (How do I leave just the non-deductible basis behind?)
It used to be standard advice to do the conversion first but now that you can't recharacterize a conversion anymore there's a risk that the rollover of the pretax will fail and you'll have a pro rata situation.
Re: Moving IRA pre-tax money to 401k (How do I leave just the non-deductible basis behind?)
I am not MrJedi, but I believe what he is saying is (after the move of pre-tax to 401K) to convert the entire tIRA to Roth. You will owe taxes on the tiny amount.GumSprings wrote: ↑Tue Oct 26, 2021 7:06 pmMrJedi.. Are you suggesting that if a trivial amount is to left behind in my IRA after Roth conversion of $5000 then I would simply leave the original IRA sitting there with a tiny balance until retirement?
For instance, if the pre-tax amount is $2 and you are in the 35% tax bracket you will owe federal tax of $0.70
Last edited by David Jay on Tue Oct 26, 2021 7:25 pm, edited 1 time in total.
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Re: Moving IRA pre-tax money to 401k (How do I leave just the non-deductible basis behind?)
If there is a trivial amount of pretax leftover, I would just Roth convert it. This will make things much simpler. The extra tax might round to zero anyway if you are talking pennies.GumSprings wrote: ↑Tue Oct 26, 2021 7:06 pm MrJedi.. Are you suggesting that if a trivial amount is to left behind in my IRA after Roth conversion of $5000 then I would simply leave the original IRA sitting there with a tiny balance until retirement?
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Re: Moving IRA pre-tax money to 401k (How do I leave just the non-deductible basis behind?)
Thanks MrJedi and David Jay for the clarification. I'm leaning towards following my original plan now that I understand how to deal with a small error in the amount left behind.
Here is another possible issue that I just remembered. My non-deductible contribution of $5000 occurred in 2009. A form 8606 was never filed with the IRS. We were using Turbo Tax at the time. Not sure what happened. My wife and I plan to file the proper paperwork regarding that contribution with our 2021 taxes. Does this create any addition problems with my plan?
Here is another possible issue that I just remembered. My non-deductible contribution of $5000 occurred in 2009. A form 8606 was never filed with the IRS. We were using Turbo Tax at the time. Not sure what happened. My wife and I plan to file the proper paperwork regarding that contribution with our 2021 taxes. Does this create any addition problems with my plan?
Striving for Simplicity
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Re: Moving IRA pre-tax money to 401k (How do I leave just the non-deductible basis behind?)
Can you explain what you mean by "recharacterize the conversion"?placeholder wrote: ↑Tue Oct 26, 2021 7:18 pm It used to be standard advice to do the conversion first but now that you can't recharacterize a conversion anymore there's a risk that the rollover of the pretax will fail and you'll have a pro rata situation.
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Re: Moving IRA pre-tax money to 401k (How do I leave just the non-deductible basis behind?)
It used to be you could undo a conversion through recharacterization but that changed a while back so if you do a conversion now it's irreversible.GumSprings wrote: ↑Tue Oct 26, 2021 7:55 pmCan you explain what you mean by "recharacterize the conversion"?placeholder wrote: ↑Tue Oct 26, 2021 7:18 pm It used to be standard advice to do the conversion first but now that you can't recharacterize a conversion anymore there's a risk that the rollover of the pretax will fail and you'll have a pro rata situation.
Re: Moving IRA pre-tax money to 401k (How do I leave just the non-deductible basis behind?)
Go to the IRS site and download the 2009 Form 8606. Print it out, fill it out and snail mail it in now. You probably only need to fill in (besides your name, ssn, and address) lines 1, 2, 3, and 14. When you file your 2021 taxes next year you will include the 2021 Form 8606. If you didn't make a non-deductible contribution for 2021 you only need to fill out Part II. Put the 2009 line 14 $5000 on the 2021 line 17. Line 16 is the amount you converted in 2021, line 17 is the basis, and line 18 is the taxable amount.GumSprings wrote: ↑Tue Oct 26, 2021 7:49 pm Here is another possible issue that I just remembered. My non-deductible contribution of $5000 occurred in 2009. A form 8606 was never filed with the IRS. We were using Turbo Tax at the time. Not sure what happened. My wife and I plan to file the proper paperwork regarding that contribution with our 2021 taxes. Does this create any addition problems with my plan?
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Re: Moving IRA pre-tax money to 401k (How do I leave just the non-deductible basis behind?)
I understand now. Thank you for your help.placeholder wrote: ↑Tue Oct 26, 2021 8:04 pmIt used to be you could undo a conversion through recharacterization but that changed a while back so if you do a conversion now it's irreversible.GumSprings wrote: ↑Tue Oct 26, 2021 7:55 pmCan you explain what you mean by "recharacterize the conversion"?placeholder wrote: ↑Tue Oct 26, 2021 7:18 pm It used to be standard advice to do the conversion first but now that you can't recharacterize a conversion anymore there's a risk that the rollover of the pretax will fail and you'll have a pro rata situation.
Striving for Simplicity
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Re: Moving IRA pre-tax money to 401k (How do I leave just the non-deductible basis behind?)
Thank you for providing specific details on how to handle form 8606. That is exactly what I need to move forward.Duckie wrote: ↑Tue Oct 26, 2021 8:51 pmGo to the IRS site and download the 2009 Form 8606. Print it out, fill it out and snail mail it in now. You probably only need to fill in (besides your name, ssn, and address) lines 1, 2, 3, and 14. When you file your 2021 taxes next year you will include the 2021 Form 8606. If you didn't make a non-deductible contribution for 2021 you only need to fill out Part II. Put the 2009 line 14 $5000 on the 2021 line 17. Line 16 is the amount you converted in 2021, line 17 is the basis, and line 18 is the taxable amount.GumSprings wrote: ↑Tue Oct 26, 2021 7:49 pm Here is another possible issue that I just remembered. My non-deductible contribution of $5000 occurred in 2009. A form 8606 was never filed with the IRS. We were using Turbo Tax at the time. Not sure what happened. My wife and I plan to file the proper paperwork regarding that contribution with our 2021 taxes. Does this create any addition problems with my plan?
Striving for Simplicity