Hi Bogleheads,
I currently have a rollover IRA with pre-tax funds from a previous employer from many years ago (basis in that account is close to zero). I also have a current employer-sponsored 401k that accepts rollovers. So I could roll that IRA into the 401k to allow me to do annual tax-free backdoor roth contributions. However, at this point in time I am not prepared to roll the IRA into my employer 401k (there are current IRA investments that are not available in the employer in 401k).
However, if I understand the current tax law correctly, I could make non-deductible IRA contributions (to a different IRA account just for ease of record keeping) subject to the annual limit and not convert those contributions at this time. This would avoid any tax liability from the pro-rata rule (liability being incurred on conversion if you have other pre-tax money in an IRA). At some future date I could roll just the pre-tax money in that first existing IRA to an employer 401k and then do my roth conversions of the post-tax money in the second account and thus avoid any tax liability from the pro-rata rule. In theory I could accumulate several years of post-tax contributions in the second traditional IRA before doing the roth conversion if I wish. The purpose of this would be not to lose the annual space for non-deductible traditional IRA contributions as I don't plan to rollover the first IRA into the 401k for some years.
Is this understanding of the current tax law correct? Also I believe any earnings that accrue in the second non-deductible IRA before the conversion would decrease the IRA basis so there would still be some tax liability resulting from that conversion. Any pitfalls I'm missing? I obviously understand tax law can change in the intervening years which may be a risk factor or I may not have access to an employer 401k plan that accepts rollovers. But other than those?
I currently have a rollover IRA with pre-tax funds from a previous employer from many years ago (basis in that account is close to zero). I also have a current employer-sponsored 401k that accepts rollovers. So I could roll that IRA into the 401k to allow me to do annual tax-free backdoor roth contributions. However, at this point in time I am not prepared to roll the IRA into my employer 401k (there are current IRA investments that are not available in the employer in 401k).
However, if I understand the current tax law correctly, I could make non-deductible IRA contributions (to a different IRA account just for ease of record keeping) subject to the annual limit and not convert those contributions at this time. This would avoid any tax liability from the pro-rata rule (liability being incurred on conversion if you have other pre-tax money in an IRA). At some future date I could roll just the pre-tax money in that first existing IRA to an employer 401k and then do my roth conversions of the post-tax money in the second account and thus avoid any tax liability from the pro-rata rule. In theory I could accumulate several years of post-tax contributions in the second traditional IRA before doing the roth conversion if I wish. The purpose of this would be not to lose the annual space for non-deductible traditional IRA contributions as I don't plan to rollover the first IRA into the 401k for some years.
Is this understanding of the current tax law correct? Also I believe any earnings that accrue in the second non-deductible IRA before the conversion would decrease the IRA basis so there would still be some tax liability resulting from that conversion. Any pitfalls I'm missing? I obviously understand tax law can change in the intervening years which may be a risk factor or I may not have access to an employer 401k plan that accepts rollovers. But other than those?
Statistics: Posted by 1stHome — Thu Dec 26, 2024 9:51 am — Replies 6 — Views 201