Non-Deductible Pro-Rata Rule Timing
Quick history – client has been making non-deductible IRA contributions each year and then converting to Roth IRA. In January of 2013 he make one contribution of $458 – then stopped contributions. In January we also converted $4920 of previous year non-deductible contributions.
client was then let go from his job and in April we rolled over his 401k $194,000
As of 12/31/2013 the ending value of the non-deductible IRA was $1173 in value but the rollover IRA value was $216,047.
Question is did we violate the pro-rata rule by rolling over the 401k later to an IRA – if so what is the fix, or is the conversion to the Roth ok since we did it earlier – before the 401k rollover?
Permalink Submitted by Alan - IRA critic on Wed, 2014-05-07 19:32
No rule was violated, but the 401k rollover changed the math on Form 8606 such that the conversion will be almost fully taxable because the 12/31/13 adjusted value of the TIRA will include the rollover. Doing the conversion before the rollover does not matter unless it was done before 2013. If client was not want to pay taxes on the conversion, it could be recharacterized back to the TIRA. If client secures a new job with a retirement plan that accepts rollovers, the pre tax amount in the TIRA could be rolled into the new plan and then the remaining non deductible contributions in the TIRA could be converted again, but tax free. In determining whether to recharacterize or not, the gains on the conversion should be considered since 2013 was a very good year for stock based investments. If there is a gain of 30% or so on the conversion, it might be best to just pay the taxes on it to keep the gains in the Roth tax free.