Pro-rata rule when doing ROTH conversions
My client has both IRA’s and an old 401(k) from a previous employer.
His IRA’s have some after-tax contributions. He wants to convert his IRA’s this year, and his 401(k) next year. Does the pro-rata rule apply to his IRA’s AND his 401(k)?
Permalink Submitted by Alan Spross on Thu, 2010-04-01 21:18
The pro rate rules apply separately to each, ie. the basis in the IRA per Form 8606 does NOT include any after tax contributions in the 401k and vice versa.
Exception: If the old 401k contains any pre 1987 after tax contributions, those can be converted separately because they can be distributed separately not subject to pro rate rules. Of course, this does not matter if client plans to convert the entire plan amount instead of isolating the after tax amounts for conversion. Only the pre 87 after contributions can be easily “isolated” from the pro rate rules.