401(k)conversion

ik6273

Hello,

I recently changed employers and considering rolling my 401(k) over into traditional IRA. Then, I would like to convert some of the traditional IRA money into a Roth IRA. I understand this will be a taxable transaction. I also understand this will make any future backdoor RothIRA conversions more taxable - meaning the aggregate rule for RothIRA conversions will apply. Any other unintended consequences I am not thinking about?

Do I need to file form 1040ES and make an estimated payment after the conversion and before 12/31? I am projected to get a refund. The refund should be more than enough to cover the federal taxes on the rollover.

Do I also need to make estimated payments to my state (MO)? Can I file any estimated payment forms via FreeTaxUSA?

MatthewD

Hello ik6273,

When employees change employers, they often roll over a 401(k) into another qualifying retirement account. A traditional IRA or other 401(k) will satisfy the requirements. I recommend that you arrange a direct rollover from one plan to the next. See this IRS page on Rollovers.

As for the Aggregate Rule, let me explain that. When an individual has more than one retirement account, the distributions are all treated as if there was one distribution (for the year). So, I do not believe that will impact any Nondeductible IRA to Roth Conversions (Backdoor Roth Conversions). Just make sure you are following the limits when contributing to a Traditional IRA during the year. For example, if your income level or employer plan makes any additional contributions to an IRA nondeductible, then you can convert that to a Roth during the year, thus making the whole conversion nontaxable. Just don't go over the IRA contribution limits.

Depending on the size of the conversion to a Roth, which will be taxable, it would be a good idea to pay up to 20% of your distribution/conversion in taxes. Keep in mind you must pay 90% of your total taxes for the year as withholdings or estimated taxes before the end of the year or 100% of what you paid in taxes the prior year to avoid underpayment penalties. You'll need to figure that out.

Missouri does have an underpayment of taxes penalty which is basically the same as the federal underpayment penalty. Take a look at where you are and make any estimated payments to avoid the penalty.