Exact process of backroor roth for someone who has an IRA from a rollover (not currently funded)

Submitted by Keith Kim on Wed, 2019-10-02 06:25

Hello all,
Thanks for your time in advance. Faced with the first backdoor roth situation.. I realize it’s more that what the textbook has.
I have a client considering a backdoor roth. He has an IRA account he rolled over from his previous job that’s just sitting NOT being funded nor planned to be funded. He also has a 401k from his work that he’s maximizing.
I’m aware that there are some rules regarding having both deductible and non-deductible IRA. Let’s say he opens up a non-deductible IRA by funding $6000 this year.

Questions:
1. does pro-rata rule apply if all/only contribution he makes this year is non-deductible?
2. also, if he just convert the new $6000 account, will pro-rata rule apply?
3. I was informed that it’s better to convert from NDIRA to RIRA right away due to taxation on the gains. to make it easy, is it better to just open a cash account and turn it over for admin purposes?

Lastly, can anyone provide a step-by-step in opening a backdoor Roth?

Thank you so much.



Submitted by Alan - IRA critic on Thu, 2019-10-03 03:40

  1. It is not clear whether he has a pre tax IRA with a balance or if the account has not been funded. Pro rata only applies to amounts actually in an IRA at the end of the conversion year or were distributed from such an IRA during the year.
  2. Yes, all non Roth IRA account balances are included in the calculation. Form 8606 does the calculation. It does not matter which account funds the actual conversion.
  3. Yes, any gains will result in pro rating of such gains regardless of how much is converted.
  4. Open an IRA account and make a non deductible contribution. Convert it right away, but if there is any pre tax balance in any other IRA accounts or in the account that receives the ND contribution, conversion will result in taxes unless the pre tax balance is rolled into an accepting employer plan, usually limited to the plan of the current employer. The conversion should not be done before the rollover of any pre tax amounts to the employer plan, because if the employer plan does not accept the pre tax rollover, the conversion will be mostly taxable and cannot be recharacterized.

Submitted by Keith Kim on Thu, 2019-10-03 17:11

His current IRA account was funded with pre-tax $ only as it was a rollover from his 401K.We are currently considering opening up a non-deductible ira as a new account. Will pro rata apply between two different accounts?

Submitted by Alan - IRA critic on Thu, 2019-10-03 17:25

Yes, the rollover IRA will be included in the pro rata calculations of Form 8606. To eliminate that, he would have to roll the rollover IRA back to an accepting employer plan.

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