Retirement Strategy? Invest in non deductable IRA instead of after tax 401k - with plan to convert to Roth IRA in 2010

Many of us are not currently eligible for Roth or traditional deductable IRA's. In my situation, I am already contributing the maximum tax deferred amount into my 401K. Therefore, additional investment dollars that I have are not current year tax deductable. And, investing in a traditional IRA that is not deductable is not long-term tax friendly. (i.e. The same invesement that would be taxed at capital gains rates outside the IRA gets taxed at higher current income rates when distributed from within an IRA)

However, my understanding is that in 2010, the tax laws remove restrictions on the conversion from a traditional IRA to Roth. Of course, you still have to pay taxes on the conversion, but the tax payments are spread over two years See here ( I know, not the best source, but free access with no registration

Traditionally, the advice when choosing a Roth vs a deductable IRA is that you choose based on whether you believe your tax rate will be lower now or lower in retirement. But, in this specific case, the advice does not apply, as I have already exhausted the tax advantaged investment options.

So, up until know, I have avoided the nondeductable IRA, preferring to invest outside retirement vehicles. But has the situation changed? The question is, for those in this situation, does it now make sense to invest in a nondeductable IRA with the express purpose of planning to do the conversion in 2010?

Paying taxes on the conversion at that point in time - which will only be on the gains as the original investment was not tax deductable?

Update June 3, 2007

This is my understanding

Please note, that recent clarifications require that you consider your entire IRA holdings, both pre-tax and after tax, in determining the percentage of your total IRA assets that are converted to a Roth IRA.

Therefore, if you have substantial IRA pre-tax monies, you cannot view that you are only converting (to the Roth) funds that are sourced only from accounts that had after-tax IRA contributions. In other words, your funds are by definition, co-mingled

Therefore, for anyone with substantial pre-tax IRA monies, (as I do from a 401K rollover), this strategy is DOA - unless you can and choose to rollover your pre-tax IRA into your company 401k

Thanks for the info. I'm slowly converting a traditional IRA (originally a 401K) into a Roth, a small piece at a time to keep current year taxes low. Looks like I may accelerate that a bit beginning in 2010.

But I don't think it's that great of a break. You still have to pay the full tax, just defer 1/2 of it for a year.

xerty, you said it bette than I did.

I am aware that Congress may take the unlimited IRA conversion away in 2010 - so there is risk

Also, I am aware that I can (and have been) making after tax 401k contributions (my company does not have a Roth 401k) But there is a downside to those contributions. Specifically, when you take a distribution, the earnings are all taxed as ordinary income. If they had been invested outside the 401K, then a large portion of those earnings would be taxed at the far lower capital gains rate.

So, all other things equal, prior to the potential opportunity to do a Roth conversion in 2010, the after tax 401K contribution and the nondeductable IRA contribution are essentially the same. (Except for the fact that you do get more distribution control when you split the after tax contributions into an IRA. The way I understand it, when you take a distribtuion from a 401K you don't get to choose whether you are taking our pre-tax contributions, post tax contributions or earnings. If you split the post contribtions into an IRA you do have more control. The exception to this is that I beleive you still can choose to take a pre-1986 after tax contribtion from a 401K first)

So, perhaps a better way to ask the question is this

Assuming that
1. you are maxing out your pre-tax 401K contributions
2. you have additional post tax income that you can invest
3. you want to invest this additonal post tax income for retirement savings

then what should the strategy be in terms of investment vehicles? Recall that

1. If the funds are invested post tax in a 401k they are comingled at distribution time and the gains are taxed (on a percentage basis) as ordinary income
2. If the funds are invested in a nondeductable IRA the gains are taxed as ordinary income at distribution time, but the current law allows a Roth conversion in 2010
3. If the funds are invested outside a retirement vehicle, the gains are taxed as capital gains
4. If in (2) the one time conversion tax is paid, then gains are not taxed.

Possibilities include
1. Stick with post tax 401k
2. Invest in nondeductable IRA up to the max, additional investements go back to the 401k post tax. Convert IRA in 2010.
3. Just go outside and get taxed at long terms cap rates

xerty said: non-deductible/after-tax 401k contributions. These work basically the same way as the non-deductible IRA (subject to some limits about your ability to convert the 401k money to an IRA without quitting your job, etc)There are no legal limits on your ability to roll over after-tax contributions with related earnings; any limits would be just those imposed by your plan.

There are 2 other things to consider:

1. If you don't want to convert the earnings, you can do a rollover of all pre-tax money from your IRA to your 401(k) before you convert. For example, let's say, in 2010, you have a traditional IRA worth $20,000 to which you've made $15,000 in nondeductible contributions, and a 401(k) to which you've made $40,000 in nondeductible contributions which have grown to $50,000 in value. You could roll over the $50,000 to your IRA, giving you $70,000 in total IRA assets, with $55,000 basis. If you then immediately converted, you would owe ordinary income tax on $15,000 (=$70,000-$55,000). If you wanted, instead, you could roll over that $15,000 from your IRA back to your 401(k), leaving you with a fifty-five thousand dollar IRA [dang obscenity filter!] with the same $55,000 basis, which you could convert and pay no tax at all.

2. Even if the law changes, and even if you can NEVER convert your traditional IRA, making nondeductible contributions is not definitely a bad thing.

IRA withdrawals are ordinary income (excluding basis), and they are basis proportionately (instead of allocating basis to particular assets, so you lose the ability to realize losses or small gains before big gains). If you would otherwise invest in a perfectly tax-efficient portfolio, that can basically transform gain that would be taxed at long-term capital gains rates (currently 15% maximum) into ordinary income rates (35% max) with no other effect. That would clearly be a bad move.

On the other hand, if you would ordinarily hold some bonds (or cash, CD's, etc.), you are much better off making nondeductible IRA contributions, and holding the bonds there, than either holding taxable bonds directly (and paying tax, at ordinary income rates, every year instead of deferring all of the income to when you're retired), or holding municipal bonds (on which you pay an "implicit tax," about 28%, every year in the form of lower yields).

Even if you want a 100% stocks portfolio, and favor highly efficient investments like index funds, it can make sense to make nondeductible contributions (even if you don't expect to be able to convert) -- it gives you the option to hold bonds in your IRA later, if you want.

For those reasons, I've been making nondeductible IRA and 401(k) contributions for several years. In 2010, if the law stays how it is, I will convert all of this money (and will have to think hard about converting the little bit of pretax money), and will have come out way ahead. If I never manage to convert, I'll at least have a bigger IRA to someday hold a more conservative portfolio, and I'll consider myself slightly ahead.

LH2004 said: ellory said: (Except for the fact that you do get more distribution control when you split the after tax contributions into an IRA. The way I understand it, when you take a distribtuion from a 401K you don't get to choose whether you are taking our pre-tax contributions, post tax contributions or earnings. If you split the post contribtions into an IRA you do have more control.No - ignoring the pre-1987 contributions issue, with either a 401(k) or a traditional IRA, the basic rule on withdrawals is the same: every single dollar is considered to be pre-tax and post-tax money in the same proportions as your overall holdings. For this purpose, with a 401(k), you look at all of your holdings in that plan; with IRA's, it's the same, except you treat all your traditional IRA's as a single plan.I agree. My point was that if your pretax contributions are in a 401K and your post tax are in an IRA you have more control at distribution time than if pre and post tax are comingled in a 401k.

As far as rollovers, my current plan does not allow a rollover from an IRA into a 401k - nor, given the broader flexibility of IRA investments would I necessarily want to.

Your point that an IRA gives greater flexibility to change investment vehicles (e.g. change from stocks to bonds) with no tax consequences is absolutely valid. Note, though, that in my case I have other signficant holdings and an anticipated 35+ years of retirement. Therefore I have ample flexibility to change my investment mix in tax sheltered accounts with no tax consequences. As far as holding municipal bonds in an IRA, that seems to me to always be a losing strategy.

I think we're I'm coming out on this is as follows

1. Invest 401k to maximize pre-tax contributions
2. Invest next $4K in nondeductable IRA. This provides the opportunity, given current law, to do a roth conversion in 2010

Then the remaining question is whether additional investments should be in the 401K (post tax) or outside

ellory said: My point was that if your pretax contributions are in a 401K and your post tax are in an IRA you have more control at distribution time than if pre and post tax are comingled in a 401k.Aha, gotcha. However, for those lucky enough to have a plan that's flexible on rollovers (see below), you're better off continuously keeping after-tax in the IRA and pre-tax in the 401(k) via rollovers -- so that a conversion can be truly tax-free, for example.As far as rollovers, my current plan does not allow a rollover from an IRA into a 401k - nor, given the broader flexibility of IRA investments would I necessarily want to.That's unfortunate. It's common for plans to have at least some restrictions on withdrawals (mine, for example, requires them to be spaced 6 months apart -- for no good reason I can think of). Most modern 401(k)'s do allow rollovers in without limitation.

It's probably not worth it for you, but if you really wanted, you could, say, start a side business, with your own solo 401(k) there; make $100 a year or something; get virtually no contributions, but be able to roll your IRA into that.As far as holding municipal bonds in an IRA, that seems to me to always be a losing strategy.What I meant was, holding taxable bonds in an IRA is better than holding munis directly. Lots of people do end up holding at least some munis, or some taxable bonds directly; almost all of those people would be better off if they could have jammed those into an IRA or 401(k), even without a deduction.Then the remaining question is whether additional investments should be in the 401K (post tax) or outsideIf your plan allows withdrawals (including outbound rollovers -- there's no way to restrict just rollovers), then you have no real downside to investing in the 401(k), as compared to the IRA. Yes, it gives you fewer, possibly inferior, choices, but if you can just roll out every after-tax contribution 5 minutes after you make it, then you can just pretend that all of your 401(k) contributions are just nondeductible IRA contributions. So, if you have unrestricted roll-outs, and it's worth making nondeductible IRA contributions, it's almost certainly worth making nondeductible 401(k) contributions too; the major exception would be if you're uncomfortable having so much of your assets in an IRA.

If you expect to be able to roll over and convert within a few years (because you expect the 2010 law to remain at least for that year, or you expect the income limit on conversions to be abolished permanently, or you expect your income to fall back to 5 figures soon), I think it's a no brainer to cram every dollar you can into a nondeductible IRA, including via your 401(k).

If you aren't confident of your ability to convert, then both nondeductible contributions to either a 401(k) or an IRA are a tough call; if you're not looking to expand the "tax-deferred room" to someday hold bonds, I would suggest doing neither in that case.

ellory said: My 401k plan does not allow rollovers, so that option does not work for me.Does it not ACCEPT rollovers, in which case you can't do the trick I've described to siphon pre-tax money from your IRA back into the 401(k)? Or does it not allow WITHDRAWALS of after-tax money? If you can withdraw the after tax money (and related earnings), you can do a rollover, whether they like it or not.

robstrash said: ellory said: Paying taxes on the conversion at that point in time - which will only be on the gains as the original investment was not tax deductable?

I believe that the conversion is the full amount, not the tax deductible only part. This is because I had a regular IRA in the mid to late 90's even though it was not tax deductible. When I converted to a Roth, I had to take the full amount in the conversion (spread over 4 years though). Therefore, I don't think your plan would work as you would have to add the full amount of the IRA to your income. If you make too much to contribute to a Roth (like me), then you are probably at a 25% or higher tax bracket.

I tried going to IRS web site to find the details but after spending 20 minutes reading through docs, just gave up. I would suggest finding out how the Regular --> Roth conversion works as those rules are not scheduled to change.Thanks. I will go reread the regulations, but I can't imagine that you pay taxes on the total conversion amount. Taxes have to be on the total earnings

See here. I suspect that the IRA you converted was a deductable IRA. In effect, the funds converted from the traditional IRA to the Roth IRA that would have been taxable had the distribution not been part of a qualified conversion will be subject to income tax at your normal tax rate. If your IRA consists only of prior deductible contributions and the earnings thereon, the total amount of the conversion will be subject to taxation.

If part of your IRA consists of prior nondeductible contributions, they will not be taxed again at the time of the conversion.As you can see, this says that a nondeductable IRA, having previously been taxed, won't be taxed at conversion time. Only the earnings which have never been taxed

ellory said: As you can see, this says that a nondeductable IRA, having previously been taxed, won't be taxed at conversion time. Only the earnings which have never been taxedThat is correct. The tax due on a conversion is the same as the tax (but not the 10% penalty) that would be due if you withdrew money.Sorry. TO be clearer, my 401k does not allow withdrawals during employment, only loansBummer.

You may want to double check that. With my plan, I have done rollovers of after-tax money a couple of times, and every time, the administrator tells me I'm not allowed to; I have to point out where in the SPD it says I am allowed.

Any chance you will have left this employer by 2010?

OP asked me to chime in on this useful thread, but I'm afraid that I have little to add but a positive rating at this point. I have never been in the happy situation where I was earning enough wage income to contribute after-tax retirement or IRA dollars, so this isn't an area where I have personal expertise.

It does seem to me like OP, xerty, and LH2004 offer a sound analysis of the possibilities here. In particular, LH2004's "trick" is underappreciated and worth repeating:The only trick to it is the fact that, at present, you can roll over pre-tax but not after-tax money from an IRA to a 401(k), which does give you a way to effectively separate the money, and only convert, or withdraw, the after-tax part. I suspect that this "trick" was unintended, but if one wants to preserve the option of moving from IRA to 401/403 plans, it also seems unavoidable. Assuming one has the ability to move funds freely back and forth into one's 401/403 plan, it seems like a method well worth exploiting in anticipation of future flexibility and opportunities to come.

(Typo edit)

LH2004 said: It used to be that after-tax money couldn't be rolled over at all, which made after-tax 401(k) contributions pretty questionable. Then, the 2001 tax law changed the rules, so that after-tax money can go from a 401(k) to another 401(k), and from a 401(k) to an IRA, but not from an IRA to a 401(k).I did not realize that the 2001 law allowed porting of after-tax 401k contributions. This further ratifies the commingling of pre- and post-tax 401k contributions in the same 401k plan.

Given that, I agree that the "fix" in this loophole should be an easy one. Moreover, I'd guess that it could likely be "fixed" during any future tax rewrite, especially if the 2010 provisions do not change. Thus I'd be looking to exploit the loophole sooner rather than later. I, for example, guess that my tax rate in the future will be lower than that at present, so I would not contribute to a Roth 401(k) (if I were offered the chance). But I would guess that it will only be about 5 percentage points lower.I don't know your situation of course, LH2004. But even so. I would put money on your tax rate increasing in the future before its decreasing. A couple of reasons:

-Current tax brackets simply aren't sustainable given structural spending patterns. That means higher taxes in a post-Bush regime. While it's always possible that we could manage to shift away from a income-tax based system, the overwhelmingly tricky policy and political problems that would ensue make this a real long shot IMO.

-While I haven't worked with you in person, I know enough lawyers to know that you are very smart about what you do. Even if your firm should fold or what not, you'll be very much in demand, and as you get older, you'll command progressively higher salaries for a long time forward.

-Judging by your other posts here, you are investing a fair chunk of money, and very prudently and shrewdly so. Should you continue this pattern of behavior, you non-wage based income will increase geometrically over time, thanks to the miracle of compounding. Some of this will be shielded, sure..but much presumedly won't be.


Obviously there are a lot of personal variables in the mix in situations like yours that others couldn't even speculate on. For instance, suppose you're still young and single. In your high brackets, the "marriage penalty" is still in effect, and should continue to be. So were you to marrying a similarly upwardly mobile professional will almost ensure that your brackets are much higher for awhile to come--at least until/unless one of you throttles way back to be at home with little ones.


Obviously, this is all a little OT, and really none of my business. I speculate on your hypothetical example only to point out that I think it's common for people to underestimate their future tax brackets when they manage to live below their means. FWIW.

LH2004 said: I hope all of that was useful to someone.No doubt it will be--a (typically) excellent analysis.So, under current law, if my income went up, even to the billions, the marginal rate would go down, though only by 3.435 percentage points. I agree that tax rates are likely to rise over the long term (I don't think it's inevitable, but I do think it's likely) -- but I don't think we're ever going back to the outrageous rates of the past. My best guess is that, including state taxes, they will be somewhere around where my current rates are.If only we could predict where they might go, it would make all this much easier.

On this question, I'm not sure what you mean by "outrageous rates of the past." The history here is interesting--some details are here. I'm sure many here don't realize that less than 50 years ago, the top Federal rate was 91% (not a typo). It's worth recognizing that with the exception of a brief period in the late 1980s-early 90s, rates are at post-great-depression lows. Meanwhile, the fiscal crisis we face in the medium-term is daunting by virtually any account.

This is why I think effective marginal rates may well increase 10% or more in the not too distant future.

robstrash said: I also didn't realize the post tax 401k "loophole" either. However, my wife has about $60k that she put in her IRA from a previous employer 401k plan. My dad says that in the IRA to Roth conversion, there is some formula that you must use that dictates how much of each type of IRA you must convert. For example, she can't put in $4k for 4 years into IRA and then just move over that $16k. She would have to move $8k from rollover IRA and $8k from new IRA.That's right, but you're missing that there's a second loophole that gets you out of that.

The rule is: when you convert, you treat all of your traditional IRA's (except inherited ones) together. You look at the total amount of pre-tax and total amount of after-tax money, and you are treated as converting in those proportions. For example, suppose you have a total of $50,000 in your traditional IRA's, and you've made $10,000 in after-tax contributions (including after-tax money rolled over from 401(k)'s). If you convert $20,000, that's treated as being 1/5, or $4000, after-tax and the other $16,000 before-tax, so you have $16,000 of taxable income from the conversion.

The loophole is: if you do a rollover FROM your traditional IRA's TO a 401(k), you are only allowed to roll over pre-tax money. So, in the example above, if you rolled over $40,000 into a 401(k), you would be left with a $10,000 IRA, STILL with $10,000 of after-tax money (and so no before-tax money). You could convert 100% of that, and it would ALL be tax-free.

Anyway, I think this is a smaller issue than you're making it out to be, as I tried to argue earlier in the thread. Converting after-tax money is ALWAYS a good thing. Converting pre-tax money is neutral on average: in general, it's a good idea if your tax rate will be higher when you're retired; and it's a bad idea if it will be lower. But, for lots of people, even if it will be lower, it will probably be just barely lower. So converting the pre-tax money is a slightly bad thing for those people, but converting after-tax money is a huge win. So, the best thing would be to use the loophole and convert after-tax money only; but, if you just convert everything, you're getting a pretty good deal, still.

robstrash said: First time I've seen it mentioned in the press:

http://money.cnn.com/magazines/moneymag/moneymag_archive/2006/08/01/8382153/index.htm?cnn=yesThanks for posting this. Maybe they'll be some more analysis in the press (I won't hold my breath)

johnqh said: Bump.
A couple of questions.

1. What if I open a new IRA account just for the aftertax contributions? Can I convert only that account?

2. Considering the conversion will be taxed with ordinary tax rate, the advantage is muddy. For example, assuming $10000 investment grown to $15000, if it is ordinary investment, the tax on the $5000 is $750 (15% capital gain). However, if it was in a traditional IRA and I convert to Roth, it will be taxed at ordinary income tax rate, which would be $1750 if the marginal tax rate is 35%. Yes, the Roth gets to grow tax-free in the future, but its starting point is lower.

3. Based on #2, the calculation becomes like this:
Roth: start from $13250, growing at 10% average per year. I picked 10% as the average return form the stock market.
Ordinary investment: start from $14250, growing at 8.5% average per year. That's counting the 15% capital gain tax.

It will take abouve 5 to 6 years for Roth to catch up the ordinary investment.

The calculation result varies depending on the initial investment and the investment income at the time of conversion, so you should do your own calculation.
Item #1 is confusing. Yes, you can convert only this after-tax IRA to Roth, but part of it may be taxable. I copied and pasted this from an article (forget which one) as it was the first example I read that made sense:

One caveat: when you convert an IRA to a Roth, regardless of whether it's a nondeductible IRA or not, you must calculate the tax due for the conversion based on all the money you have in all IRA accounts you own.

In other words, you can't just move your nondeductible contributions to the Roth and escape paying any tax. So, for example, if you've got $50,000 in total IRA assets and $10,000 of that came from nondeductible IRA contributions, then 20 percent of the amount you convert would not be taxed ($10,000 divided by $50,000), while 80 percent would ($40,000 divided by $50,000).
So, since I moved all my IRA to a Roth many years ago, I don't currently have a regular IRA. Therefore, I don't have to worry about taxes so this is a viable plan. However, my wife rolled over 2 401K plans into IRA's when she changed jobs. Therefore, we are not going to do any Standard --> Roth conversion for her as it would increase our taxes quite a bit (she has over $50k in these IRA accounts).

For Item #2-3, looking at the math while listening to a conference calls, but think it appears correctly.

Converting pre-tax IRA to Roth IRA is not neutral, for two reasons.

1. Income change. The whole idea is, you withdraw from pre-tax IRA after retirement when your income is lower, so you are in lower tax bracket.
2. Tax bracket change. The tax bracket changes according to inflation, that benefits withdrawing later instead of earlier.

AMT adds more complication to the situation.

Tax law changes all the time, so that adds uncertainty.

So, I would rather not converting from pre-tax IRA to Roth, unless I take one year off from work to lower the tax bracket.

I have a traditional IRA(pre-tax) and a SEP-IRA, so the next question is, is it possible to set up a self-employment 401K in 2010 and transfer both of them to self-employment 401K and only convert the after-tax IRA to Roth?

So shall we conclude the following should be one's strategy, assuming a) the tax rate will go up, not down, at retirement; and 2) one does have the funds to make all the contributions:

1. max out the 401k contribution
2. max out the roth IRA contribution
3. max out the after-tax IRA contribution to be converted to roth IRA in 2010
4. max out the roth 401k contribution

Does it make sense?

Edited on Oct 3rd: as been pointed out, #4 should be 'max out the after-tax 401k contribution'.

LH2004 said: 2. Converting pre-tax money is not such a bad thing. You pay tax now in return for paying nothing in the future.

I'm not sure I'd trust Congress not to sneak some tax levy onto your Roth withdrawals 30 or more years down the road. When Congress decides to change the tax rules, they typically give a grace period of 5 years or less, and even then the relief is only partial.

minnesotan said: 1. max out pre-tax 401k contribution
2. max out roth IRA contribution if possibleGenerally, these 2 don't go together (if you have the full array of choices): if a Roth IRA is better than a traditional IRA for you, then a Roth 401(k) is also going to be better than a traditional 401(k). In both cases, the choice depends mainly on whether you expect your tax rate to go up or down (and which options you're eligible for).5. continuously move the pre-tax portion - both the pre-tax contribution made at the beginning of one's career, and the pre-tax earnings from the after-tax contributions - from one's IRA into one's 401k; 'continuously' because such ability might diminishAssuming you prefer the investment options available in your IRA (anything you can afford) to those in your 401(k) (the handful selected by your employer), I would not do the roll-backs (from IRA to 401(k)) until necessary: I'd want as much of my money as possible to spend as much time as possible in the IRA. In my case, I continuously (as often as my plan allows) move after-tax money from 401(k) to IRA, where it all sits; in 2010, when it's time to convert the IRA, I'll make the call about whether to roll back or convert the pretax money. Then, after I've completed the conversion, I'll again roll all of this money out (at least until it's time to convert again).

A quick question:
Since the total contribution to IRA is limited for given year($4000 for 2006), if I do 2. max out roth IRA contribution, I won't be able to do 3. max out after-tax IRA contribution, right? Thanks.

minnesotan said: Bump.

An edited 4 step strategy from my earlier version.

So shall we conclude the following should be one's strategy
1. max out pre-tax 401k contribution
2. max out roth IRA contribution if possible
3. max out after-tax IRA contribution to be converted to roth IRA in 2010
4. max out the after-tax 401k contribution, then move the after-tax portion out into traditional IRA right away
5. continuously move the pre-tax portion - both the pre-tax contribution made at the beginning of one's career, and the pre-tax earnings from the after-tax contributions - from one's IRA into one's 401k; 'continuously' because such ability might diminish

assuming
a) the marginal tax rate is NOT expected to go down significantly at one's retirement at retirement;
b) one does have the funds to make all the contributions;
c) one's 401k allows the roll-out of after-tax contribution to traditional IRA, which should be the case for most people; and
d) one's 401k allows the roll-in of pre-tax money from traditional IRA, which should be the case for some people, and will continue to be the case even after the congress decides that both pre- and after-tax money can be moved into 401k plans

analytic168 said: Let's say in 2010 I've rolled over all pre-tax money into my 401(k), and converted my after-tax nondeductible Traditional contributions to the Roth. Yay!

Now when can I roll back the 401(k) money back into an IRA? The same year? I don't think anyone here has yet mentioned that the Roth conversion plan, as I understand it, is supposed to work in years beyond 2010 as well. So rolling the money back and forth out of the 401(k) is important for making the plan work beyond 2010.Yes. The taxability of the conversion depends on the amount of pre-tax money in your IRA(s) at the time of the conversion. So, you could do the traditional IRA->401(k) rollover on Jan. 2, convert the IRA on Jan. 3 at no tax, then do the 401(k)->traditional IRA rollover on Jan. 3, to again have full flexibility with your investments.
Also, will most 401(k)'s allow rollovers out of the 401(k) while still letting you keep the 401(k)? Is it possible to do a partial rollover of the 401(k)?If it's possible at all, it will be in part.

Think of your money in your 401(k) as being in 2 buckets:

1. what I call "401(k) money," which is the (pre-tax or Roth) money from salary deferrals and growth of that money;

2. everything else: matching contributions, incoming rollovers, after-tax employee contributions, forfeiture allocations, and non-matching employer profit sharing or other contributions.

The bucket 1 money CANNOT be removed from the plan except under narrow circumstances. The bucket 2 money can be removed any time you want, subject to any limits applied by the plan.

What we're talking about here is withdrawing (by rollover) some of the bucket 2 money. The plan may not let you take it, or may impose limits (for example, my employer's only lets you withdraw this money once every 6 months). But it definitely will not let you take the bucket 1 money while you're still working there and not yet 59 1/2 (other than in a few special circumstances), so, if you're doing the rollover, it will leave behind your pretax salary deferrals.

If you're already left the employer, or turned 59 1/2, it will depend on the plan's terms.