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| Image by @dino via Flickr |
If you have an IRA that includes contributions that are both pre-tax and post-tax (deductible and non-deductible) as well as growth, you may have an option available to you that will allow for a tax-free Roth conversion.
As you know, a Roth conversion can be done with IRAs that have mixed contributions, but when this is done, you will owe tax on a portion of the rollover – the portion that includes the pre-tax money. Even if your pre-tax money is in a totally separate traditional IRA, the conversion of your post-tax money will be partly taxed due to the cream-in-the-coffee rule, which requires that all IRAs be considered as one with regard to distributions (including Roth conversions).
If you happen to have a 401(k) plan (or other Qualified Retirement Plan) that you’re participating in, you may have the option available to roll over your pre-tax money from the IRA into the QRP.
Many QRPs have the option available to allow for roll-in of IRA money. What’s cool about this is that roll-ins are only allowed when the money is pre-tax, as in deductible contributions or growth of the account. What this means is that you can separate the cream from the coffee – that is, separate the pre-tax money from the post-tax money, by rolling the pre-tax money into your QRP. Then, what’s left is your post-tax money, which you can freely convert to a Roth IRA without incurring tax.
