Roth conversion and prorata rules

Submitted by Thomas Ferry on Wed, 2014-02-12 21:56

If client converts a non deductible IRA to Roth tax free, then later during the same calendar year rolls a pre tax 401k to an IRA, do the pro rata rules apply to the conversion in determining tax, or is the new rollover IRA ignored for the fact that it was created AFTER the conversion (but in the same year as the conversion)?

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Permalink Submitted by Alan - IRA critic on Wed, 2014-02-12 22:01

Since the taxation of the conversion is based on the year end balances of all non Roth IRA accounts, the rollover will make the conversion mostly taxable even when the 401k rollover is done after the conversion. Of course, the conversion can be recharacterized if client does not wish to pay the tax bill.