The Basis That Has to Be Tracked

The obstacle

Direct contributions to a Roth IRA phase out above income levels that a client of this profile passed long ago. The account is nonetheless attractive, because qualified distributions are tax free and the account is not subject to lifetime required minimum distributions for the original owner.

Two routes exist. Neither is a loophole in the sense of being unintended; both are the consequence of provisions that fit together in a particular way.

The first route, and the rule that defeats it

A non-deductible contribution to a traditional IRA is available regardless of income. Converting that contribution to a Roth is also available regardless of income, the income limit on conversions having been removed years ago. Contribute, then convert.

If the traditional IRA held nothing else, the conversion is largely tax free because the contribution had basis and no gain has accrued. The difficulty is that most people at this stage have other IRAs.

The standard remedy uses an asymmetry in the rule: balances in an employer plan are not counted. Rolling a traditional IRA into a current employer's plan, where the plan accepts roll-ins, removes it from the calculation and restores the intended result.

1. 01Confirm the employer plan accepts roll-ins of pre-tax IRA money. Many do; not all.
2. 02Complete the roll-in before the end of the year of conversion. The aggregation is measured at year end, not on the date of the conversion, which means a roll-in completed late in the year can still rescue a conversion made earlier.
3. 03File the form that tracks non-deductible basis, every year, whether or not a conversion occurred. Basis that was never reported is basis that will be taxed a second time on withdrawal, and reconstructing it decades later is close to impossible.

The second route, and what it depends on

The larger version operates inside an employer plan. Beyond elective deferrals and employer contributions, the overall annual additions limit leaves headroom that can in principle be filled with after-tax contributions, which are distinct from Roth deferrals.

Those after-tax amounts are then converted, either through an in-plan Roth conversion or by withdrawing them to a Roth IRA. The amounts involved are several times the IRA contribution limit, which is why it attracts attention.

Everything turns on the plan document. The plan must permit after-tax contributions, and it must permit either in-service withdrawals of them or an in-plan conversion. Most plans permit neither, and no amount of planning changes a document the participant does not control.

Where it fits, and where it does not

The honest framing is that these are useful and modest. For someone earning several million a year, even the larger route addresses a limited share of annual income, and it should be understood as a long-horizon, tax-free compounding sleeve rather than a solution to the year's tax position.

Two points determine whether it is worth doing at all. Conversion accelerates tax now in exchange for tax-free growth later, so it is most attractive where the current rate is expected to be lower than the future rate, or where the account has a very long horizon. And the estate characteristics matter: a Roth passing to beneficiaries who must empty it within a decade still distributes tax free, which is a meaningfully better outcome than the same balance held pre-tax.