Rolling IRA into 401k

[drivingaround]

I need help determining if this retirement investment option is a solid idea. Bit of background:

Ages - 32 & 36 (MFJ)
Gross income w/bonuses - $200k
AGI - $185k (max 401k’s but have investment income)

Our income has fluctuated the last 5 years so aren’t always able to make contributions to Roth IRA due to exceeding income limit. Typically fund current year contribution Jan – Mar then a year later, when filing taxes, recharacterize the Roth as non-deductible contribution to regular IRA. The amount recharacterized depends if allowed a partial contribution or not. With the income limit on converting IRA contributions to Roth IRA eliminated, thus enjoying tax free growth, I want to know if this would 1. Work and 2. Be smart.

DH IRA includes:

Rolled over 401k - $125,000
Non deductible contributions – $15,000
Earnings – $5,000 (this is an estimate, I need to dig up paperwork on exact amount)

DW IRA includes:

Rolled over 401k - $90,000
Non deductible contributions – $15,046
Earnings – $5,000 (this is an estimate, I need to dig up paperwork on exact amount)

Based on my research I could roll the 401K portion and related earnings into current 401k’s (Assuming our plans allow it) then convert the non deductible contributions and earnings to Roth IRAs. By rolling the 401k portion into current 401k we can avoid including any of the rollover in 2011 income. That is the only reason we’re considering it given converting the full balances to Roth doesn’t make sense with our tax bracket. Does anyone have experience doing this? Our 401k investment choices are more limited than IRA however tax free growth & distributions on our non deductible contributions is what we’re looking for. What I haven’t been able to locate information on is if rolling the earnings into the 401K plan counts towards your current year contributions.

If the above scenario isn’t a good idea should we quit making nondeductible contributions? Leaning towards yes since capital gains tax is significantly less than ordinary income tax rates but 40 years of tax free growth is enticing.