Timing of Roth Conversion and Pro-Rated Rule
If someone has only one IRA and converts all 15k of the entire Traditional IRA and it is all non-deductible dollars because the account has no gains, I understand that the tax on conversion is zero since there are no other IRAs and the entire account is basis. However, what if that person subsequently transfers 50k from a 401k into a Rollover IRA in the same tax year, but after the 15k conversion was completed earlier in the year? Does the person have to use the pro-rata rule on the entire 65k IRA amount, or is it a moot point because the Roth conversion was done before the 401k transfer? I didn’t know if the IRS looks at the pro-rata rule based on the day of the conversion, or on the last day of the tax year.
Thank you!
Permalink Submitted by Alan - IRA critic on Mon, 2017-04-17 19:12
Pro rating is based on adjusted balances at the end of the year. This is done on Form 8606 where line 6 requires the year end balance to be entered. If the 50k 401k rollover was delayed until after the end of the conversion year, the conversion would stay tax free.
Permalink Submitted by John Wright on Mon, 2017-04-17 19:58
But from what I understand if the rollover IRA is transferred back or rollovered back to the 401k in the same tax year, this will effectively solve the problem?
Permalink Submitted by Alan - IRA critic on Mon, 2017-04-17 20:27
Yes, that would solve the problem. But if the person is no longer employed by the plan sponsor and the plan had issued a total distribution, there is a good chance that the plan would not accept a rollover back to that plan. The person may have a new employer plan that will accept the rollover, but if they are retired the chance is not good.