The Pro-Rata Rule
Is the pro-rata rule based on what happened during the entire year summarized as of 12/31/2010? Or as the events occur?
Stuation : Client has a traditional IRA, current value 58k, of which 24k is after tax dollars. If he converts today then 34k is taxable over 2011 and 2012. He currently has no other IRAs.
However, he is currently in the process of terminating his profit sharing plan. He will rollover his profit sharing account to a traditional IRA in October 2010 (approximately).
The rollover amount will be approximately 1 million. Is the taxable amount of the 58k conversion affected? Is the taxable amount now approximately 95% of the 58k?
Permalink Submitted by Alan Spross on Thu, 2010-01-14 23:17
Yes, the year end balance determines the pro rate rules, NOT the ratio that exists at the date of conversion. But for the unique 2010 situation, if the conversion income is reported in 2011 and 2012, the taxable factor is not determined until 12/31/2011 and 12/31/2012 for the deferred conversion reporting. The 2010 balances will have no bearing.
Some options might include leaving the PS plan where it is, or if client want to move it sooner, they could opt out of the two year deferral and then transfer the the PS plan in January, 2011. The pro rate factor would then be determined by the 12/31/2010 balance and a much higher tax free portion for the conversion would be generated.
If the current plan will accept a rollover of the 34k pre tax amount, client could then convert the remaining basis to a Roth in 2010, opt out of the two year deferral and then transfer the PS plan in January 2011.
Another option will limited useage for some clients would be to do the rollover of PS plan to IRA now, then roll the pre tax IRA amount back into an employer plan prior to 12/31/2011 to get them out of the pro rate calculation as of year end 2011. But it is not always predictable that the current plan two years from now will accept IRA rollovers. If this option is still interesting, be sure to keep the PS plan in its own rollover IRA account and do not commingle them with contributary IRA accounts. Some plans will only accept incoming rollovers from conduit or rollover IRA accounts to protect against receiving after tax transfers, which they cannot accept.