Pro Rata Rule in reverse
I have a client who has the following accounts:
Rollover IRA with $300,000 (all pretax)
IRA with $250,000 ( $50,000 of after tax money)
401k plan in amount of $50,000 (Plan accepts rollovers from IRA’s)
In advance of converting some of the IRA to a Roth can I roll over the amount in the Rollover IRA back into the 401k plan, thus increasing the % of after tax money in the remaining IRA account. This would then allow for less tax on the Roth Conversion.
In other words does the pro rata rule apply in reverse?
Thanks as always
Howard
Permalink Submitted by Alan Spross on Mon, 2010-04-05 17:56
Yes, that strategy is a way to increase the tax free % for a conversion by transferring as much of the pre tax amount to a qualified plan as you can. The amount transferred to the qualified plan is eliminated from the year end balance and the transfer is simply ignored when completing the 8606 for the conversion.
In the example, some plans may only accept the 300k rollover and not the other 200k from the contributary account because they are afraid of receiving after tax amounts by mistake. But even with the rollover limited to 300k, 20% of a Roth conversion would be tax free.