isolating after tax cost basis of traditional IRA

[Comenius]

I plan to leave my job later this year. I have a 403(b) with my current employer that allows rollovers from a traditional IRA. I also have a traditional IRA with an after tax cost basis of $27K. I'd like to isolate that tax basis so that I can convert it tax free to my Roth IRA, enabling me to withdraw it penalty free if needed. The 403(b), traditional IRA and Roth IRA accounts are all with Vanguard.

This is what I'm currently considering:

- convert $27K within my traditional IRA to the Prime Money Market fund to keep it separate
- rollover the balance (minus that $27K) of my traditional IRA to my 403(b)
- convert the remaining $27K balance of my traditional IRA into my Roth IRA
- once I leave my job, roll my 403(b) back to my traditional IRA

Does this approach make sense?

[Hotstreak]

The question is a little confusing, which I think is why you're not getting any responses.  I hope this helps, I'm no pro! 

Tax basis isn't important for an IRA, since you don't report capital gains on sales within an IRA or on withdrawals from an IRA (the dollar amount withdrawn is reported as income).  Are you assuming you can only roll over your "basis" from the IRA to the Roth IRA?  If so, my understanding is that you can roll over the entire amount, no need to consider your "basis". 

You will need to wait 5 years to withdraw the funds from the Roth IRA, or face penalty  This is where your contribution amount or "basis" is important, since you will be able to withdraw your rollover amount but you won't be able to withdraw the earnings (without paying penalty). 

I don't see any benefit from rolling your IRA to your 403b.

Are you going to take another job, or are you going to be retiring?  If you are retiring, consider waiting until next year to roll your funds from the IRA to the Roth IRA.  That rollover is reported as income on your tax return, so doing the rollover during a lower income year is usually a good idea.

I plan to leave my job later this year. I have a 403(b) with my current employer that allows rollovers from a traditional IRA. I also have a traditional IRA with an after tax cost basis of $27K. I'd like to isolate that tax basis so that I can convert it tax free to my Roth IRA, enabling me to withdraw it penalty free if needed. The 403(b), traditional IRA and Roth IRA accounts are all with Vanguard.

This is what I'm currently considering:

- convert $27K within my traditional IRA to the Prime Money Market fund to keep it separate
- rollover the balance (minus that $27K) of my traditional IRA to my 403(b)
- convert the remaining $27K balance of my traditional IRA into my Roth IRA
- once I leave my job, roll my 403(b) back to my traditional IRA

Does this approach make sense?

[Undecided]

I plan to leave my job later this year. I have a 403(b) with my current employer that allows rollovers from a traditional IRA. I also have a traditional IRA with an after tax cost basis of $27K. I'd like to isolate that tax basis so that I can convert it tax free to my Roth IRA, enabling me to withdraw it penalty free if needed. The 403(b), traditional IRA and Roth IRA accounts are all with Vanguard.

This is what I'm currently considering:

- convert $27K within my traditional IRA to the Prime Money Market fund to keep it separate
- rollover the balance (minus that $27K) of my traditional IRA to my 403(b)
- convert the remaining $27K balance of my traditional IRA into my Roth IRA
- once I leave my job, roll my 403(b) back to my traditional IRA

Does this approach make sense?

Before the IRS split publication 590, there was a chart and note that made it pretty clear this worked.

Hotstreak, I think you're missing the point of what Comenius is trying to do, which is to get all the non-deductible contributions now in his or her IRA into a Roth IRA (as that's not a taxable event) without pulling along the taxable portion (deductible contributions and earnings on any contributions), as that would be taxable. Comenius could roll over the whole amount to a Roth, sure, but only wants to do so to the extent it's not taxable.

[Comenius]

Undecided, yes, that's exactly what I'm trying to do. :)

[Proud Foot]

That sounds like a good plan but I do not believe you are actually able to separate out your contributions like that.  From reading IRS form 8606 and Pub. 590a, my understanding is that any distributions are treated pro-rata for the non-taxable and taxable portions.

You should meet with a tax CPA before you start so there are not any surprises when you file your taxes next year.

[Undecided]

That sounds like a good plan but I do not believe you are actually able to separate out your contributions like that.  From reading IRS form 8606 and Pub. 590a, my understanding is that any distributions are treated pro-rata for the non-taxable and taxable portions.

You should meet with a tax CPA before you start so there are not any surprises when you file your taxes next year.

Not sure what you're looking at, but 590A says:

"Kinds of rollovers from a traditional IRA. You may be able to roll over, tax free, a distribution from your tradi- tional IRA into a qualified plan. These plans include the Federal Thrift Savings Fund (for federal employees), de- ferred compensation plans of state or local governments (section 457 plans), and tax-sheltered annuity plans (sec- tion 403(b) plans). The part of the distribution that you can roll over is the part that would otherwise be taxable (in- cludible in your income). Qualified plans may, but are not required to, accept such rollovers.

Tax treatment of a rollover from a traditional IRA to an eligible retirement plan other than an IRA. Ordi- narily, 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 could not be rolled over. However, a special rule treats a distribution you roll over into an eligi- ble retirement plan as including only otherwise taxable amounts if the amount you either leave in your IRAs or do not 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."

Seems like it's ok, no?

[Comenius]

Yes, that's the IRS language I had read before that led me to that conclusion.

[Proud Foot]

Thanks for the bolded portions.  Those helped me understand that portion better.  Seems ok.