Woud This Create a A Pro Rata Situation?

Submitted by fairira on Wed, 2020-11-04 00:57

An employee makes an annual contribution to his nondeductible TIRA at Vanguard which he then Roth converts except for a token amount left in the Vanguard account to keep it open. He would of course have to stop contributing after he retires and no longer has earned income.

He also contributes to to a 401(k) and a cash balance plan through his employer.

Should either of these 2 plans end before he retires, he may have to remove those assets and so would then want to directly roll them into a TIRA. If he first removes the token amount in the TIRA by Roth conversion so that there would be 0 in the TIRA on let’s say June 1, 2021 and rolls over the qualified plan to the TIRA on June 3, 2021, would he have avoided a pro rata situation or not?

Thank you.



Submitted by David Mertz on Wed, 2020-11-04 03:21

If any of the individual’s traditional IRAs have basis in nondeductible contributions, the pro rata calculation of nontaxable and taxable amounts of the Roth conversion and any other distributions from the traditional IRAs is required.  Since the pro rata calculation uses the year-end values of the traditional IRAs, not the value on any other date such as June 1, the individual’s Roth conversions will be largely taxable even though the traditional IRAs had a zero balance prior to the rollovers from the qualified retirement plans.  For the pro rata calculation, the Roth conversions and any other distributions are effectively treated as having occurred on December 31 no matter the actual date that they occur.

Submitted by fairira on Thu, 2020-11-05 08:22

I hope this attempt at formatting will help make my earlier post more readable.. DMx, Thank you.I have 2 questions which I hope you may answer. 1.   About the “Backdoor Roth” thread that began 11/3/20 and on which you commented:     It appears to me that the client’s plans involved having, at least briefly in 2020, a balance in a SIMPLE IRA and a contribution to a ND IRA which he planned to Roth convert in 2020. If these 2 IRA’s are not a pro rata situation, is it because both the SIMPLE IRA and ND IRA balances would be 0 at year-end? 2.  With regard to my first post in this thread, “Would This Create A Pro Rata Situation?”: If the employee Roth converts all of his post-tax ND contribution assets in his TIRA in the same year even though after he rolls his employer plan assets (all pre-tax) into that TIRA, is this still a pro rata situation though the year-end assets of his TIRA would be all pre-tax with 0 post-tax? If this would still be a pro rata situation, I would appreciate if you could help me understand why. Thank you.  

Submitted by fairira on Thu, 2020-11-05 08:35

  Submitted by [email protected] on Thu, 2020-11-05 00:22The content is the same as my earlier post a few minutes ago but this formatting should be clearer, I hope.  DMx, thank you. I have 2 questions which I hope you may answer.  1.   About the “Backdoor Roth” thread that began 11/3/20 and on which you commented: It appears to me that the client’s plans involved having, at least briefly in 2020, a balance in a SIMPLE IRA and a contribution to a ND IRA which he planned to Roth convert in 2020.  If these 2 IRA’s are not a pro rata situation, is it because both the SIMPLE IRA and ND IRA balances would be 0 at year-end?  2.  With regard to my first post in this thread, “Would This Creata A Pro Rata Situation?”:  If the employee Roth converts all of his post-tax ND contribution assets in his TIRA in the same year even though after he rolls his employer plan assets (all pre-tax) into that TIRA, is this still a pro rata situation though the year-end assets of his TIRA would be all pre-tax with 0 post-tax?  If this would still be a pro rata situation, I would appreciate if you could help me understand why.  Thank you.  

Submitted by David Mertz on Thu, 2020-11-05 13:23

  • If there is a nonzero balance in traditional IRAs at year end, the pro-rata calculation will result in the basis in nondeductible contributions being only partially applied to any distributions or Roth conversions made during the year.  The remainder of the basis remains in the individual’s traditional IRAs to be applied to future distributions until the balance in traditional IRAs is zero *at year-end*, at which time the last of the basis is applied.  Only if the year-end balance in traditional IRAs is zero will *all* of the basis be consumed and applied to reduce the taxable amount of any distribution or Roth conversion done during the year.
  • The relative timing during the year of contributions for the year, distributions (including Roth conversions) from and rollovers to the individual’s traditional IRAs has no effect on the pro-rata calculation.  The calculation treats all of these as if they occur on December 31.  See Form 8606 Part I where you’ll see that the calculation involves nothing about the timing of the transactions in accordance with the requirements of section 408(d)(2) of the tax code.
  • Rolling over a qualified retirement plan balance to a traditional IRA later in the year after having done what was intended to be a nontaxable backdoor Roth is a relatively common mistake that makes the Roth conversion partially, usually largely, taxable.

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