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IRAs and Roth IRAs
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Solo 401K question and IRA conversion for 2010 prep

I currently have a solo 401(k), and employer sponsored IRA, a traditional IRA (one with deductible contributions and one with nondeductible contributions since 2006), and a Roth IRA.

I have read that if I roll over my traditional IRA into my solo 401K that it is not included in the pro rata calculation for conversion. Is this true? I also read that SEP-IRA contributions do count in the calcuation.

Also, if I move my deductible IRA into my solo 401K, does that count as a contribution and limit my total employee contribution for 2009 (which I guess is $16,500 for 2009) or does that $16,500 employee contribution independent of conversions?

Thanks so much for all your helpful advice. I love this site!

Zip Code: 01801

Re: Solo 401K question and IRA conversion for 2010 prep

I'll answer the easy questions first.

Money in your SEP needs to be factored in with your other IRAs when determining how much of your Roth Conversion will be taxable to you in 2010.

And if you rollover your IRA into your Solo 401k, that rollover should not reduce your $16.5k of allowable salary deferrals this year. My question to you would be whether your Solo 401k is set up to accept IRA rollovers.

For your last question, I'm not 100% sure what the correct answer is, and I need to find out the actual rules. On one hand, rolling over your rollover IRA into a non-IRA retirement plan should reduce the taxes on your Roth conversion. I'm just not sure you would not need to allocate some of your IRA basis to that rollover.

The professional staff of my office meets every Tuesday to go over various tax issues. I will hand out this question at the meeting, and ask everyone to research this issue so we can all know the correct rules for 2010.

I'll post what I find out when I find it out.

Zip Code: 01801

Re: Solo 401K question and IRA conversion for 2010 prep

Great news!! We found this answer in IRS Publication 590, Individual Retirement Accounts:

Tax treatment of a rollover from a traditional IRA to an eligible retirement plan other than an IRA:

Ordinarily, 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 eligible 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.

Zip Code: 01801