I want to convert a portion of my Rollover 401k traditional balance to Roth. I was hoping to do this in my 401k plan but a Roth 401k conversion is not supported in my company's plan. My company's plan does support a Rollover withdrawal to a 3rd party IRA.
Current Balances
Rollover - Traditional 401k: $550k
Rollover - Roth 401k: $0k, no conversions to Roth 401k supported
Traditional IRA: $0k
Roth IRA: $300k (includes $7k non-Deductible contribution converted to Roth for TY2021)
It appears that the only option is for me to rollover part of my 401k traditional balance to my traditional IRA then convert to a Roth IRA.
Desired sequence-of-events
Withdraw $100k from Rollover - Traditional 401k balance to my Rollover - Traditional IRA
Convert $100k from Rollover - Traditional IRA to Roth IRA
My questions:
Is this the best way to convert $100k of Rollover - Traditional 401k to Roth IRA without impacting my ability to do a $7k non-deductible IRA contribution / Roth conversion?
In order for me to convert to Roth, would I need to reverse my non-deductible IRA contribution / Roth conversion of $7k made earlier this year?
Are there any other potentially negative tax consequences that would really make a mess of this?
In order for me to convert to Roth, would I need to reverse my non-deductible IRA contribution / Roth conversion of $7k made earlier this year?
I can't answer your other questions, but the answer to this one is that you can't undo a Roth conversion.
I assume you've thought through the implications of doing a Roth conversion of $100k of pretax money (and paying the associated taxes).
Thank you. Yes, I'm prepared to pay the additional Federal/State taxes as a result of the conversion to Roth.
I didn't ask this in my original post but what I was really asking is how does the Pro Rata rule affect the $100k Conversion to Roth along with a $7k non-deductible contribution to IRA converted to Roth?
You apparently have a current 401k. Are you saying that your 401k contains a $550k balance that was rolled into it from a previous IRA or 401k? If yes, and if your plan allows, you could roll $100k of that directly to Roth IRA. It does not need to go into tIRA along the way. In fact, if there is a delay, sending that money through tIRA may mess things up.
If you are trying to do something with the elective deferrals you have made to your current 401k, you are not allowed to do that unless you are 59.5 and the plan specifically allows it.
You have also apparently also used the backdoor process to get $7k into Roth IRA this year. As long as your tIRA balance is $0 (or a few pennies) at the end of this year, you do not need to do anything (there is nothing to fix).
When tax time comes (if all this gets done by the end of the year) you will have converted $107k to Roth and $100k will be taxable. You should start figuring out now how your Form 8606 should look on your taxes. Do not depend on a tax-preparer to know what to do for this.
If your Dec 31 value of your traditional is $0, the pro-rata rule won't come into effect. It only matters if you have residual funds in tIRA at the end of the year. You would fill out form 8606 when you do taxes for the year. It should show that your carry over basis is zero.