By Kaye A. Thomas
Current as of February 10, 2018
This strategy was sometimes helpful under prior law.
This page describes a strategy for isolating basis that was helpful to some people under prior law. As a result of guidance issued by the IRS in September 2014, there is no longer a need to use this strategy. We retain this page only for reference by those who may have used this technique in the past.
In Isolating IRA Basis, we explained a method that can be used to eliminate pre-tax dollars from an IRA so that the remaining balance consists only of after-tax dollars. The IRA can then be converted to a Roth with zero tax cost. We can use this technique as part of a sequence of steps designed to isolate basis in a 401k or similar employer plan. If available, this approach is more desirable than others because there’s little doubt as to the tax consequences and it doesn’t require income tax withholding.
- Step 1: Roll the 401k account to an IRA. Now you have an IRA with basis. (If you have more than one IRA, you have to treat them as one for purposes of the following steps.)
- Step 2: Roll the pre-tax dollars in your IRA (or IRAs, if you have more than one) to a 401k or similar retirement plan. The rules permit only pre-tax dollars to be rolled from an IRA to an employer plan.
- Step 3: Convert the remaining IRA, which at this point consists only of after-tax dollars.
The main issue here is the availability of an employer plan that will accept a rollover of the pre-tax dollars from the IRA, so that you can complete step 2. Employer plans are permitted but not required to accept these rollovers, so your ability to use this strategy isn’t assured even if you are still a plan participant after making the rollover in step 1.
You may be able to set up your own solo 401k plan for this purpose if you carry on a business. Be sure to use one that is designed to accept these rollovers, and keep in mind that you must treat this as a genuine retirement plan and not simply a vehicle to accomplish this procedure.
- Isolating Basis for a Roth Conversion
- Isolating IRA Basis
- Basis Recovery from Employer Plans
- Separate Subaccount Treatment
- Simple Payout
- Using an IRA to Isolate 401k Basis
- Split Rollover Methods