TRADITIONAL AND ROTH IRA FUNDING STRATEGY
General question for Roth IRA funding: if an individual has 100% pre-tax IRA accounts, and wants to fund a Roth – whether directly in the manner of a contribution or using the back door Roth IRA conversion strategy because their income exceeds the limits, does the pro-rata rule apply?
Permalink Submitted by Alan - IRA critic on Tue, 2016-12-20 23:53
The pro rata rule applies only in the case of a conversion, whether a back door Roth or not. Pro rata taxable amounts are calculated on the Form 8606 reporting the conversion. The pro rata factor is based on the relation of the IRA basis to the total adjusted year end value of the non Roth IRA accounts. The usual method of eliminating any taxes on these conversions is to roll the pre tax dollars of all non Roth IRAs into an accepting employer plan before the end of the year of the conversion.