Backdoor Roth – Pro-Rata Rule

Submitted by Ed Burgio on Fri, 2020-11-20 17:58

Hello,

Thanks in advance for any help with this – I’m having trouble finding an answer on this online or through accountants.

So, I have a Traditional IRA worth about $310k. $92k on this is from after-tax contributions. I’m trying to get this money into a Roth while avoiding the Pro Rata rule.

Through work, I have a 401k that will accept rollover money from the IRA, and will distinguish the funds by qualification (after-tax, pre-tax, etc.) Can I (1) rollover the pre-tax amount to the 401k, then (2) convert after-tax IRA to a Roth, and then (3) rollover the pre-tax amount back out to a Traditional IRA?

It seems to make sense to me – especially the first two steps… but does 3 work? Is there amount of time I have to keep the money in the 401k?

Alternatively, can I rollover the full balance to the 401k (pre-tax and after-tax), and then take a direct rollover back out with the $92k going into a Roth? This way may be easier because then I only need the 401k to keep track of what’s pre/after tax, while the first way requires the 401k and the IRA custodian to keep track.

Again, I truly appreciate any help.

Thanks,

Ed



Submitted by Alan - IRA critic on Fri, 2020-11-20 18:25

  1. Yes, steps 1 and 2 will work, although time is about to run short on completing both these steps this year. Would get right on it, because the IRA to 401k rollover can take awhile. Once you are sure that the 401k has deposited your pre tax IRA balance, you can then convert your IRA basis immediately. 
  • With respect to step 3, better check with the plan to confirm that the rollover money can be rolled back out anytime you wish. If so, be sure to wait until January before rolling it back to your IRA or you will trigger the pro rate rules for the conversion you did in 2020 and destroy your strategy.  Also, note that if you want to do annual back door Roth conversions in the future, you need to leave the pre tax funds from your IRA in the 401k.  In deciding where these funds should end up consider the expenses and investment options in the 401k along with the back door Roth considerations.
  • Alternate plan will not work because you cannot roll IRA basis (non deductible contributions) into an employer plan. Therefore you need to be sure your Form 8606 is complete and accurate including any non deductible contributions made for 2020. Note that the IRA custodian does not keep track of your IRA basis, that is done by you on Form 8606, so this is between you and the IRS. The IRA custodian does not know or care what your IRA basis is.

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