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Is a rollover from pre tax IRA back to pre tax 401K , then back door IRA taxable?

Forum|Forum|5 years ago
May 3, 2021
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Client rolled over all pre tax traditional IRA (previously from all,100% pre tax 401K) back into pre tax 401K. Then made a non deductible traditional IRA contribution and immediately converted to Roth (back door IRA). Client argues that this is not a taxable transaction since no IRAs are in existence at the time of the Roth conversion. My position is that the funds came from 100% pre tax 401k and the source for the back door IRA came from pre tax, therefore is taxable . If some of the 401K was post tax, then we do the math and go from there, but this was all pre tax. The fact that there is no IRAs does not tell the whole story here since the source was 401k to IRA to 401K. OR, does the IRS only look at the value of any current IRA????

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Best answer by qbteachmt

The Traditional IRA was populated by the 401K

"The Traditional IRA was populated by the 401K"

When?

Example:

Old 401(k) rolled to Trad IRA, then rolled to new employer's 401(k), then rolled to Traditional IRA? Because that part in BOLD is where you specifically stated a nondeductible contribution was made. That contradicts that a Rollover was made.

Which was it?

IRonMaN

Level 15

Tell your client to quit listening to tax advice down at the barbershop. You can't take pretax money and put it into a Roth IRA without first stopping to pay some tax on that money.

Slava Ukraini!

rbynaker

Level 13

I'm having trouble reconciling these two conflicting statements:

Then made a non deductible traditional IRA contribution

and

the source for the back door IRA came from pre tax,

Was the IRA contribution non-deductible or pre-tax?

J

jesdq1Author

Level 4

The IRA is non deductible due to the high income of the client (IRA limitations). The source of the IRA came from all pre tax 401k.

qbteachmt

Level 15

"My position is that the funds came from 100% pre tax 401k and the source for the back door IRA came from pre tax, therefore is taxable"

But that's not what you stated. Let's separate out the two types of Plans:

Employer and Individual

For Employer Pan: You stated there was the Reverse Rollover. As long as all Trad IRA money is now in the Employer 401(k), and none went into Roth 401(k), there is no conversion and no taxable event; and now, the person has no tax deferred amounts in Trad IRA, SIMPLE IRA or SEP.

For Individual: Now that there is nothing tax deferred outside of the Employer plan, they put a nondeductible contribution into Trad IRA and immediately rolled it to Roth IRA. That is Backdoor Roth, and since there is only Basis, there is no taxable event.

"The IRA is non deductible due to the high income of the client (IRA limitations). The source of the IRA came from all pre tax 401k."

The way you stated it, you have two different events.

"The fact that there is no IRAs does not tell the whole story here since the source was 401k to IRA to 401K."

That is the First part = Employer. There is nothing taxable about that part.

*******************************Don't yell at us; we're volunteers

J

jesdq1Author

Level 4

Thank You. I guess I am not making myself clear and I am not understanding (sorry it has been a long challenging tax year). Their were two events, one being the Reverse Rollover and the second event was the non deductible IRA back door. I agree the first event is non taxable. I am having a hard time understanding why the second event is not taxable. Yes, the client does not have an existing Traditional IRA, Simple IRA or SEP. But, the dollars used to fund the non deductible IRA came from a 401k that has zero basis. Help me understand how the rollover transforms tax deferred into no tax deferred or no basis.

If an IRA existed at the time of the back door we must use an allocation method to arrive at the taxable amount. So, why do we not have to use an allocation method for the back door from a 401k? Your help is greatly appreciated.

qbteachmt

Level 15

"But, the dollars used to fund the non deductible IRA came from a 401k that has zero basis."

You didn't describe this at all. You stated the funds for the 401(k) came as a rollover from a Trad IRA, which itself was a rollover from a 401(k). If all of that is true, then the funds stayed tax sheltered the entire time. The Backdoor Roth had nothing to do with the Employer-related activities. Perhaps you stated it incorrectly, or perhaps what you are thinking of really has no impact on anything.

You never stated he held back some of the funds in between any of the rollover steps. If he did, that would be a Distribution. Once you have these funds in your possession and have paid taxes and any penalties on them, they are just Your Money, at that point. There is no further examination needed for the Source. It's the same as any other money available to you and on hand. Take a vacation. Make an investment.

Next, when you fund your Nondeductible IRA, that's from money on hand. Employment takehome, Car wash, selling drugs, selling eggs, or a prior retirement distribution...Source or why you have these funds on hand, has no bearing on the use of the funds. The use of the funds has no bearing on the source of the funds. It's your money to do with what you want to.

Is there something you need to restate for understanding the path of the Roth Conversion, working backwards step by step, from Roth conversion to Nondeductible IRA to ????

*******************************Don't yell at us; we're volunteers

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