Backdoor Roth – pro-rata rules
My client’s income is too high to make a direct Roth contribution, and he has a 401k with his employer so he can’t make a deductible Traditional IRA contribution either. He also has a deductible Traditional IRA that is currently being rolled into his 401k to remove it from the equation for the pro-rata rules.
Does the rollover of the IRA to the 401k need to be completed before the client makes the non-deductible IRA contribution?
Permalink Submitted by Alan - IRA critic on Tue, 2020-12-22 22:27
No, but it is risky to convert the non deductible contribution before knowing that the 401k plan has accepted the pre tax IRA money, because if they do not accept it that conversion will be mostly taxable. This is also very late in the year for the IRA to 401k rollover, because who knows if it will be completed in time. At this point, once the rollover is done, the ND contribution can be converted, but it’s OK if the conversion does not get done until January. So the order of things should be 1) complete pre tax IRA rollover to 401k 2) Make ND contribution 3) Convert the entire remaining TIRA balance which should be almost entirely the 2020 ND contribution. Client also needs to be sure not to roll over any IRA basis (from ND contributions from any year) into the 401k plan since 401k plans are not allowed to accept IRA basis.
Permalink Submitted by Jeff Beebe on Wed, 2020-12-23 08:37
Is it critical that the IRA to 401k rollover is completed by the end of the year? If the rollover is not completed until January, and the client makes the 2020 ND contribution after the rollover is completed in January, does that create any issues?