IRA basis after transfer

Brokers are allowed to take more restricted views of transfers than what tax law allows.

You are correct that from a tax perspective you can do what you say.

However, the broker is free to refuse to allow a transfer from "tainted" IRAs.

There's actually non-silly reasoning behind it: if you screw up and transfer $X to the 401(k) where X is greater than the combined pre-tax dollars, that can cause big problems.

Because of that, some brokers will limit the transfers to "untainted" accounts only because doing so will guarantee that X cannot possibly be greater than the combined pre-tax dollars.

Other brokers are willing to give you the chance to hang yourself :)

Ok. You confirmed my suspicion. She didn't say they'd refuse (as if sticking to old rules), but said IRS would still want to prorate the pretax/post-tax amounts. Thanks, Rich.

Well, pro-ration or not is a whole separate thing. :)

I recommend reading Kaye Thomas's article on isolating 401(k) after-tax basis for a Roth IRA conversion (even though you're talking about IRAs). The section headed "Strategy 4" is directly on-point for what you're asking:

As long as you haven't done a non-custodial rollover in the past 12 months, you could always do such a rollover to move it yourself.

Yup, I know Kaye, I like his work. "What's more, employer plans are now permitted to accept rollovers from IRAs without the previous restriction that they contain only money received in a rollover from an employer plan. However, only pre-tax money can be rolled from the IRA to an employer plan."

This seems to confirm what I thought. If only pretax money can be transferred out, then only post tax remains. From this, I should be able to take my total IRA balance, subtract my (8606) document post tax deposits, and transfer to the 401(k).

The remaining post-tax money can then convert to Roth with tax near zero. The few dollars it may have risen between 401(k) transfer and the conversion will be taxable.

The agent, when I used a straight $100K pre tax / $100K post-tax example kept saying even after the $100 pretax was transferred, the $100K Roth conversion would be subject to having 50% of it taxed, as if the transfer out to the 401(k) hadn't occurred.

Again, please closely reread "Strategy 4" on that page. Because of a difference between what the JCT intended and the language that actually ended up in the Internal Revenue Code, there is a danger that a transfer will NOT do what you want it to do -- the literal language of the IRC calls for pro-ration when a direct transfer is done. The safer way to proceed is to dump the TIRA(s) into a non-IRA account, then write separate checks to the 401(k) and to the RIRA.

Again -- reread that section of the article.

Hmm. I see the ambiguity, and wonder if the IRS would come up with a ruling as they did with Wash sales. Part of my approach was wanting to avoid liquidating, just transfer in-kind. Given the wording, I'm still unclear how pro-rating works with a direct transfer into a 401(k). The 401(k) isn't a Roth and shouldn't be sent post tax money.

Rich - This is from Pub 590. Does this not clearly satisfy what I'm trying to do? Or do you read it as saying a distribution (i.e. not direct transfer) has to occur. Doesn't a direct transfer count as a distribution for this purpose?

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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.

I agree with you that what you quote from Pub 590 is about what you want to do.

However, the text of IRS publications is not controlling and as I understand it, the IRS is not even bound by them (though relying on IRS publications is probably a good reason to request an abatement of penalty).

The point is that (according to Mr. Thomas -- I haven't personally cross-checked the IRC) the Internal Revenue Code (which is controlling) calls for pro-ration if there's a direct transfer. That it calls for such is probably a drafting error in the law, given what the report of the Joint Committee on Taxation reportedly says. However, it is the law and if you want to be extra sure that the IRS can't come back and demand pro-ration, you may wish to follow "Strategy 4" because it follows what the literal language of the IRC says will result in non-proration, which is what you want.

Another reason, in my book, for being conservative and following the IRC is the "WSJ effect". If there's suddenly a lot of press about those eeeeeevil 1%ers (or 5%ers, or whatever) coming up with a way to do no-tax Roth conversions, the IRS might start holding people to the literal language of the IRC and/or pushing Congress for a statute change.

I understand, if 590 isn't good enough, a Forbes articles citing a CPA in Brooklyn (my home town, by coincidence) even less so. Just thought the article interesting. It may stir more dialog.