Neutralizing Pro Rata Rule
I left my previous employer this year, and rolled over $40K from my traditional 401(K) into my traditional IRA.
Now, I am in the fortunate position of needing to do a backdoor Roth conversion. I added $6K into my traditional IRA, and was about to convert that to Roth when someone informed me of the pro rata rule. Now obviously I can’t afford to move the entire $46K into Roth, big tax bill, and also don’t want to get get taxed on 87% (40K divided by 46K) of moving that $6K into my Roth IRA.
My question is, am I able to roll over the original $40K from my IRA into my new employers 401(k)? I would then move the $6K remaining in my traditional IRA to my Roth IRA. Any other advice on neutralizing the pro rata rule would be appreciate.
P.S. This website / forum is a goldmine. Tons of great info!
Permalink Submitted by Alan - IRA critic on Sun, 2022-09-11 15:55
You are correct that if your current 401k will accept IRA rollovers, you can roll all but 6000 from your IRA into the plan by direct rollover. Your 6000 conversion will then be non taxable. This is the only way for you to resolve this issue. Some 401k plans will only accept rollovers from IRA accounts that never received a regular IRA contribution, so you should be aware of that possible plan limitation. You should also complete the IRA to 401k rollover prior to converting the 6000 just in case the plan refuses the rollover for whatever reason.