Pro-Rata Rule
An individual on January 1st of the tax year has a $ 0 value in their traditional IRA. They make a non-deductible IRA contribution of $6,000 on Feb. 1 and then takes the same money out Feb. 5.
On March 31 of the same year, they roll over $ 200,000 from their employer retirement plan to a roll-over IRA. Does this value get added to the denominator for the “pro-rata” computation?
Permalink Submitted by David Mertz on Mon, 2021-03-22 14:57
The pro-rata calculation of the taxable amount of a regular distribution on Feb 5 is based on the December 31 balance which includes the $200,000 rolled over from the employer plan. The fact that the traditional IRAs had a zero balance between Feb 5 and March 31 is irrelevant. To avoid that, the Feb 5 distribution should have been made as a return of contribution which would have avoided the use of Form 8606 and the pro-rata calculation.