Back-door Roth Conversion, No pre-tax IRA balance year end? or at time of conversion?

Submitted by David Mitchell on Sat, 2015-10-03 21:09

Hello all,
I am looking for a little help with this question. Current year, taxpayer will be ineligible to do a Roth Contribution due to income. Taxpayer has a 70,000 pre-tax TIRA balance, and already contributed $3,000 into Roth. Taxpayer knows they need to recharacterize their Roth contribution as a Traditional Contribution first. Then, they happen to be covered by a workplace retirement plan which accepts pre-tax incoming rollover money. What is the correct ordering of the process to get this money from the roth to the traditional, then remove the pre-tax from the post-tax to only convert the post-tax to the roth? Finally, according to the Form 8606, the taxpayer seems to need to keep this pre-tax balance out of IRAs at year-end, is that correct? follow-up question, then, can the taxpayer simply convert the post-tax balance from the TIRA into the Roth, then just make sure to take the rest of the pre-tax TIRA and roll that over into his employer plan before year-end? As far as I understand the 8606 this should be totally fine. Thanks in advance for your help! -Dave



Submitted by Alan - IRA critic on Sat, 2015-10-03 22:34

  • Dave, you understand what taxpayer needs to do, just have a question regarding the order. First, recharacterize the Roth contribution as a non deductible TIRA contribution. Recharacterize into the current TIRA. There could be a small amount of earnings going with it and that will increase the pre tax balance. The order of the next two transactions does not matter, but if there is any doubt about the employer plan accepting an IRA pre tax rollover, get the pre tax rollover done first. Last, convert the remaining TIRA basis to Roth tax free. Or if there is no doubt about the employer rollover going through, taxpayer can convert the amount of basis (3,000) first and then be sure to complete the employer rollover before year end.
  • Note that if the Roth contribution has a loss, then less than 3000 will be transferred to the TIRA. However, 3000 can still be converted to Roth tax free even though some of it will come from the former pre tax balance. In other words a small portion of the 70k TIRA will now be after tax since the basis is 3000 regardless of gains or losses on the regular Roth contribution before it was recharacterized. This shows why the recharacterization is always done first so taxpayer will know exactly how much is being transferred to the TIRA, and will then know how much of the TIRA is pre tax to transfer to the employer plan.

Submitted by David Mitchell on Sun, 2015-10-04 15:39

small follow-up question, I have done a few of these rollover into employer plan to segregate post-tax basis in TIRA things… Something I have never thought of was making sure the qualified plan still holds all the pre-tax IRA money at year-end. I only think of doing it at the time of conversion. It is true, then, that one pitfall a taxpayer can have is rolling back out their qualified plan balance into a TIRA before year-end, correct? thank you.

Submitted by Alan - IRA critic on Sun, 2015-10-04 18:39

Yes, you are correct. Any pro rating is based on the year end balance of all non Roth IRA accounts .

Submitted by Jeffery Acheson on Fri, 2020-02-28 18:41

The year-end balance snapshot is at the current year-end or the previous year-end to determine that balance for the pro-rata calculation when wanting to do a Backdoor Roth?

Submitted by Alan - IRA critic on Fri, 2020-02-28 19:35

The current year end. The prior year end balance is used to calculate current year RMDs. 

Submitted by Jeffery Acheson on Sat, 2020-02-29 20:59

Thanks for that clarification which upon reflection triggers another questions. Can I make both a 2019 and 2020 contribution to the non-deductible IRA in March of 2020 while at the same time simultaneously rolling the existing traditional pre-tax IRA into the 401(k) and then doing the Roth conversion of the forementioned 2019 and 2020 contibutions using the December 31st 2020 balances for the aggregation test? In other words, can I use the 12-31-2020 balance to negate tax implications on the 2019 contribution made in 2020 since there was a pre-tax balance still in place as of 12-31-2019?

Submitted by Alan - IRA critic on Sat, 2020-02-29 22:21

Yes. You can make both your 2019 and 2020 contributions at the same time and convert them at the same time. However, you should still complete the pre tax balance rollover to the 401k before converting. Your 2019 year end balance has no effect on conversions you do in 2020, but the pre tax balance for all your IRAs at the time of the rollover is the amount you should roll over to the 401k .

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