I had ended up with two SEP IRAs, one solo 401k, one traditional IRA, and no Roth IRAs. The traditional IRA has a mixture of pre-tax and after-tax contributions. We have been reporting the cost basis to the IRS each year.
I was able to roll over both SEPs into the solo 401k. That leaves the traditional IRA.
Here’s the question: can I then roll over the pre-tax and gains part of the traditional IRA into the 401k, leaving the after-tax contributions which could then be rolled into a Roth?
Or, is it not allowed to split the traditional IRA like that, and I’d have to convert it to a Roth on the pro-rata basis, paying income tax?
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Tax treatment of a rollover from a traditional IRA to an eligible retirement plan other than an IRA.
“Ordinarily, when you have basis in your IRAs, any distribution is considered to include both nontaxable and taxable amounts. Without a special rule, the nontaxable portion of such a distribution couldn’t be rolled over. However, a special rule treats a distribution you roll over into an eligible retirement plan as including only otherwise taxable amounts if the amount you either leave in your IRAs or don’t roll over is at least equal to your basis. The effect of this special rule is to make the amount in your traditional IRAs that you can roll over to an eligible retirement plan as large as possible.”
I read this as saying I can roll over the pre-tax part of the traditional IRA into my eligible retirement plan (401k), leaving only the after-tax basis, which can then be rolled over to a Roth with no tax due. Does that seem right?
Yes. Employer 401(k)s that take rollovers generally don’t allow after-tax basis to be rolled over. As you found, there can be exceptions, but the employer’s plan has to allow you to roll those after-tax contributions over, and I haven’t seen one that does - although there may be some. With a solo 401(k), you are the employer, so if your administrator allows it in your plan, you could potentially roll the basis into the solo 401(k).
But why would you want to? You would be giving up the opportunity to split the basis from the pre-tax money. Once they are split, you are allowed to roll the basis (and any earnings that have occurred since the split) into a Roth IRA, paying taxes on just the earnings. It’s a great way to be able to stop having to track and pro-rate the basis, and get more money into your Roth IRA.
Yeah, that’s kind of a moot point because you can roll the after-tax money into a Roth IRA, which is still an “eligible retirement plan”. It’s just not a 401(k) plan.
Mentally split the IRA into pre-tax and after-tax contributions (the basis)
Roll the pre-tax to the 401k
Roll the after-tax contributions to a Roth, tax-free
This was the plan, but my Fidelity rep is claiming it is not allowed, and I would have to roll to a Roth only, paying income tax on the pro-rata basis. I think he’s wrong.
That may be an administrator rule for the plan. To get around it, you could physically (instead of mentally) split the IRA into 2 different accounts. One with the basis amount and the other with the pre-tax amount. Roll the pre-tax IRA into the 401(k). If they ask, tell them there is no basis - because you’ve moved the basis into a separate IRA. Then after the pre-tax money is in the 401(k), roll the basis account into a Roth IRA. If you’ve had any gains since you split it, you will have to pay taxes on those gains.
I have percentages going to eight different beneficiaries, but I can see that different accounts might open up other possibilities for tuning what goes to each, not just how much.