Pro Rata Rule in reverse

Submitted by Howard Hook on Mon, 2010-04-05 14:23

I have a client who has the following accounts:

Rollover IRA with $300,000 (all pretax)
IRA with $250,000 ( $50,000 of after tax money)
401k plan in amount of $50,000 (Plan accepts rollovers from IRA’s)

In advance of converting some of the IRA to a Roth can I roll over the amount in the Rollover IRA back into the 401k plan, thus increasing the % of after tax money in the remaining IRA account. This would then allow for less tax on the Roth Conversion.

In other words does the pro rata rule apply in reverse?

Thanks as always

Howard

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Permalink Submitted by Alan Spross on Mon, 2010-04-05 17:56

Yes, that strategy is a way to increase the tax free % for a conversion by transferring as much of the pre tax amount to a qualified plan as you can. The amount transferred to the qualified plan is eliminated from the year end balance and the transfer is simply ignored when completing the 8606 for the conversion.

In the example, some plans may only accept the 300k rollover and not the other 200k from the contributary account because they are afraid of receiving after tax amounts by mistake. But even with the rollover limited to 300k, 20% of a Roth conversion would be tax free.

Permalink Submitted by Howard Hook on Mon, 2010-04-05 20:40

Alan,

Thanks. So In my example I assume that if I try to roll $200k of the $250k in the second IRA and the 401k plan custodian accepts the rollover that I can consider the $50k left in the IRA as containing all after tax money?

Thanks

Howard

Permalink Submitted by Alan Spross on Mon, 2010-04-05 20:50

Howard,
Yes, and then the 50k could be converted tax free.

Permalink Submitted by Howard Hook on Mon, 2010-04-05 20:55

Wow. Theoretically can then roll back out of the plan into IRA in 2011?

Reason I have so much flexibility is that the 401k is a solo 401k plan which has fairly flexible provisions regarding rollovers etc.

Howard

Permalink Submitted by Alan Spross on Mon, 2010-04-05 21:25

Yes, you could roll the plan back to a TIRA in 2011 in you wanted to.

Permalink Submitted by Howard Hook on Mon, 2010-04-05 21:28

Thanks Alan.