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Here's some background information about Dave

For 2016, Dave has

  1. Worked for a company (say, Employer A) that offered a 401k and he contributed to it. Say the balance of the 401k is $30k.
  2. Also contributed, say $5000 to a traditional IRA for the same year.
  3. Paid about $300 in additional tax to the IRS for the excess $5000 contribution to the IRA (Form 1040 #59 Additional tax on IRAs, other qualified retirement plans, etc)
  4. The filing included a Form 5329 documenting the excess contributions (Line 15, 16,17 were $5000 (excess), $5000 (total) and $300 (tax) respectively)
  5. Has not claimed a deduction for the $5000
  6. Left Employer A in Dec 2016

For 2017, Dave has

  1. An income that disqualifies him from contributing to a Roth IRA
  2. Joined an employer (say, Employer B) for this year that did not offer a 401k
  3. Has NOT converted any of these $5000 in to a Roth IRA in 2017.
  4. Has contributed about $5500 towards a traditional IRA
  5. Has NOT converted any of these funds to a Roth IRA in 2017
  6. Has rolled over $30k from Employer A to a traditional IRA. The money left the financial company at the end of Dec. 2017 and was received by the new firm in 2018.

Now, Dave is about to file taxes for 2017. #12 appears to be a big mistake as I read that I could have rolled over $30k directly to a non deductible IRA and then convert it to a Roth IRA without any tax consequences.

In Dave's current situation, how can he convert all of these funds to a Roth IRA in 2018 with the least amount of tax consequences for 2017 and 2018?

  • Unfortunately, there's no such thing as a Roth conversion without tax consequences. In the example above, Dave's $30k can't be rolled over directly into a Roth anyways, and would have to be rolled over into an IRA and then converted. – JW8 Mar 12 '18 at 1:08
  • "3. Paid about $300 in additional taxto the IRS for the excess $5000 contribution to the IRA" Why is the $5000 Traditional IRA contribution "excess"? Did he already contribute $5500 into Traditional/Roth IRAs for 2016 in addition to that $5000? – user102008 Mar 12 '18 at 1:08
  • @JW8: "Dave's $30k can't be rolled over directly into a Roth anyways, and would have to be rolled over into an IRA and then converted." Not true. Since 2008, you have been able to convert a Traditional 401(k) directly to Roth IRA without going through a Traditional IRA. – user102008 Mar 12 '18 at 1:10
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    @user6123723: You may have been confused by the income limits for deducting a Traditional IRA contribution when the person or their spouse has contributed to a 401k that year. When the person or their spouse contributed to a 401k that year, if the person makes above a certain amount of income, they are no longer able to deduct their Traditional IRA contribution. But in that case the Traditional IRA contribution is nevertheless a valid, non-excess contribution -- it is a non-deductible (after-tax) Traditional IRA contribution. – user102008 Mar 12 '18 at 6:08
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    @user6123723: The principal of the contribution, yes, will not be taxed on conversion. But the earnings will be taxed upon conversion. You were supposed to file Form 8606 Part I the year of the nondeductible contribution to record the basis, and when you file Form 8606 Part II the year of the conversion, it will calculate how much of it is taxable. Also note that conversions from Traditional IRA are subject to the pro-rata rule, so if you had previous pre-tax money in Traditional IRA it would complicate the calculation of how much of the conversion is from pre-tax and how much from after-tax. – user102008 Mar 12 '18 at 15:01
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For 2016, Dave did not claim a deduction. His $5000 IRA deposit was just a non-deductible deposit. No 6% penalty.

He should amend the 2016 return. The penalty was not required, and he now has one traditional IRA, total deposits $40,500 (?) with a $5000 non-deducted amount.

Agreed that he should have converted that $5000 to Roth in 2017. That's behind us now.

  • Joe does have till 4/15/18 to do the Traditional to IRA conversion right? – user6123723 Mar 27 '18 at 21:00
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    Conversions are for the year they occur. A deposit can count for prior year if made by tax day (4/15 or so) but conversions cannot be made for prior year. – JoeTaxpayer Mar 27 '18 at 21:03

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