Backdoor Roth IRA Pro Rata Rule
I don’t do these but have a client that would like to if possible.
The client currently owns a Beneficiary IRA, a Traditional IRA, and a Simple IRA which he funds.
Reading the Pro Rata rule it seems he can’t do the Backdoor Roth IRA unless I am missing something.
Thoughts on this would be appreciated, thank you.
Permalink Submitted by Alan - IRA critic on Fri, 2022-08-12 14:59
The inherited IRA can be ignored, but the pre tax balances in the SIMPLE IRA and TIRA will result in the back door conversion being mostly taxable on Form 8606. The only way to eliminate taxes on the conversion is to roll the pre tax balances of those two accounts into an accepting employer plan if client is working and has such a plan that accepts IRA rollovers. NOTE: The SIMPLE IRA cannot be rolled over to a non SIMPLE Plan in the 2 years following the first SIMPLE contribution, and even if the SIMPLE is over 2 years, if it is active it will be receiving new pre tax contributions that will result in prorating of the conversion. It’s easier if the SIMPLE is over 2 years and is not receiving new contributions or employer matching. As always, be sure client’s MAGI is too high for a regular Roth contribution as the annual MAGI limits continue to increase due to inflation adjustments.
Permalink Submitted by James Arnold on Fri, 2022-08-12 15:17
That is what I thought too, he is the employer so there is nowhere to move the Simple, thank you, it isn’t worth the hassle.
Permalink Submitted by Alan - IRA critic on Fri, 2022-08-12 15:23
When convenient he might consider a 401k plan to replace the SIMPLE IRA. That would permit larger contributions and eliminate the pro rating problem present with either a SEP or SIMPLE IRA.