Author Topic: tIRA(s) ->Roth conversion help, understanding sequencing and steps I would need  (Read 336 times)

MidWestLove

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Greetings and thank you for reading this
I am in the low income year (in between leaving corporate job and starting a consulting service) so I thought to use it to convert some tIRAs to Roth side and would  welcome your suggestions on things I may be overlooking.

I have 3 IRA accounts total
 Rollover IRA with Vanguard 170k
 SEP-IRA through Vanguard 2k
 traditional IRA through Schwab 40k

The total amount of non-deductible contributions (form 8606 is 36k)

I have also a Solo 401k with Fidelity created for consulting practice using combination of discountsolo401 documents and Fidelity non-prototype accounts.

What I was thinking of doing is
1) transfer all assets (ideally directly without any checks) from Rollover IRA at Vanguard into Solo 401k pre-tax space.
2) transfer all sets from SEP IRA into Solo 401k pre-tax space
3) open new Roth account, and convert 40k of Schwab tIRA (custodian to custodian ideally) which should give me
3.a ~40k new Roth account
3.b ~4k in taxable income (40k of value - 36k of total non-deductible contributions )

Questions
- does this approach makes sense or is there a better one?
- will I trigger pro-rata rules in steps 1 or 2 or would both be non-taxable events. I only care about steps 1 and 2 to not trigger pro-rata rule and my understanding it applies only to IRAs and not to 401k/403b accounts
- anything else I need to watch for?

Thank you!

secondcor521

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It makes sense to me and is roughly what I did for roughly the same reason I think you're doing this...to avoid pro-rata rules.

I don't think you will trigger pro-rata rules and the IRA->401k rollovers should be nontaxable events.

If your 401k is not at Vanguard, Vanguard will probably require that they send you a check when you do the rollover.  You will just endorse the check and send it on to your 401k custodian.  It always seems nerve-wracking to me when this happens, because you've got large checks floating around in the mail, but it has always worked out just fine when I have done things like this.

Things to watch for:

1.  Make sure your Schwab IRA is the only IRA you're left with.  I'm assuming this is the case - that is, that you only have 3 IRAs total and not a fourth one somewhere else you've forgotten to mention.
2.  Make sure your 401k allows incoming rollovers before starting this whole process.  Not all do.  You can ask your 401k custodian or check the summary plan document (SPD).
3.  I don't think it is strictly necessary, but when I did something similarly I did the IRA->401k rollovers and made sure they completed before I did the tIRA->Roth conversion.  You want to avoid some sort of administrative delay or paperwork holdup that screws up your plans.

Finally, you might as well open your Roth IRA with Schwab if you're happy with them.  That should make your tIRA->Roth conversion simple.

Good luck.
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MidWestLove

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Thank you

And just to be sure, while for taxes we are joint (filling MFJ), IRAs are completely separate for individual so my wife's accounts  (tIRAs, rollovers, etc) are not in any way counted for pro-rate purposes?

for 401k plan , it is a plan for which I am the administrator/trustee and documents are written in a way that I am certain it accepts rollovers. Just have to check the proper way to execute consolidation of the IRAs without Vanguard thinking they are distributing the IRA and issuing incorrect forms come tax time..

secondcor521

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I am not sure about the answer to your first question.  I would be a little worried if you are MFJ.  Take a look at the instructions for Form 8606 and see what it says there.

As far as the rollover is concerned, just tell Vanguard that you're doing a rollover to your employer 401k and they should code it correctly.  They'll report it to the IRS but the codes on the forms should make it tax free.  Note that you should also report the amount on your tax form on line 15a or 16a and mark it as a rollover, with line 15b or 16b zero.
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