Pro-Rata for Mega Backdoor Roth
Does the pro-rata rule apply when someone is doing a mega backdoor Roth with after tax contributions to their 401(k)? I have a client looking to do a mega backdoor Roth conversion but she has ~ $1mm in an IRA. Want to confirm that won’t be a factor and that the only taxes will be taxes on the growth of the after-tax contributions.
Permalink Submitted by Alan - IRA critic on Mon, 2024-08-26 11:19
Only the gains on the after tax contributions will be taxable. The 1099R from the plan will show the taxable amount in Box 2a, and the composition of any IRA is irrelevant. The tax result is the same whether the rollover is into the Roth 401k or to a Roth IRA.
That said, there have been situations where the request for this transaction was not clear or was mishandled by the plan and pre tax 401k amounts that were not in the after tax sub account were converted. The request should be clear that only the after tax balance in the plan is to be converted. If there is any risk in doing an on line transaction or if the amount is large, this should be ordered through a plan rep and the rep should state the complete request, preferably on a recorded line.
Permalink Submitted by sarahkcharles on Tue, 2024-08-27 10:36
Thank you!
Permalink Submitted by Rene Grey on Wed, 2024-08-28 13:25
Is it possible that the after tax contribution is kept completely separate from the gains, with the gains being in the pre-tax portion on the 401k? So when converting the after-tax contribution to the Roth, there are no taxable gains?
Permalink Submitted by Alan - IRA critic on Wed, 2024-08-28 18:20
No, gains in the after tax sub account cannot be transferred to the pre tax 401k account. They must be distributed along with the after tax contributions. However, a split direct rollover sending only the after tax contributions to a Roth IRA and the gains to a traditional IRA would eliminate any current taxes.