Handling Pro Rata Issue and Roth Conversion

Submitted by Dan Stroh on Wed, 2014-03-05 14:50

Hi All,
I have a client with an IRA holding both pre-tax (from old 401ks) and post-tax funds. We mistakenly converted the post tax money into a Roth in 2013 before realizing that Pro Rata rules would apply. One solution seems to be to recharacterize the Roth conversion. Could the client instead also take the tax hit on the pretax portion of the 2013 contribution and then convert the rest of the account in 2014 (again taking the tax hit on just the pre-tax portion)?

In essence, he would convert the entire account to the Roth but do so in two steps.

Thanks very much!

Dan

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Permalink Submitted by Alan - IRA critic on Wed, 2014-03-05 18:43

There is no need to recharacterize the conversion if the client would have converted pre tax dollars anyway. The 2013 conversion could be partially recharacterized leaving half the conversion in place. Then after a 30 day waiting period the recharacterized portion could be converted in 2014 and the tax bill would be split between two years. Another option exists if the client has a current qualified plan that accepts IRA rollovers. He could recharacterize in full, then roll the pre tax balance into the qualified plan. That would leave only the basis in the IRA which could then be converted 100% tax free.