BACK DOOR QUESTION

Submitted by john Styrbicki on Fri, 2023-07-07 15:23

I have done back door roth conversions for many years including this year (2023) for both myself and my wife. I had converted all IRA’s to roths and therefore have never had to concern myself with the pro rata rule.

I have now decided to do an in-service 401k rollover which I hope to complete later this month, in July 2023. My 401k contains both traditional and roth contributions.

Will the Back door roth conversion that I completed in January 2023 be subject to the pro rata rules? Or, because I did the conversion in January before I completed the rollover in July, will my 2023 back door conversion NOT be subject to the pro rata rules?

If the 2023 back door conversion IS subject to pro rata, is there anyway I can “un-do” my 2023 back door conversion, or will I have to keep it intact and pay the taxes?

Thanks.

John



Submitted by David Mertz on Fri, 2023-07-07 16:00

  • If you roll pre-tax funds from the traditional 401(k) to a traditional IRA anytime in 2023, your January 2023 Roth conversion will become largely taxable due to the pro rata calculation using the year-end value in traditional IRAs.  The relative timing of the transactions within 2023 is irrelevant.  Whatever amount of basis in nondeductible traditional IRA contributions does not get applied to the Roth conversion will remain with your traditional IRAs to be applied pro-rata to future traditional IRA distributions.
  • The Roth conversion is irrevocable.  There is no way to undo it.


Submitted by john Styrbicki on Fri, 2023-07-07 16:36

Thank you for the response!Would I be subject to the pro rata rule for my 2023 back door conversion if I just do an in-service rollover on the Roth portion of my 401k? I checked with Fidelity and they confirmed that I can roll over just the Roth portion if I wish.



Submitted by john Styrbicki on Fri, 2023-07-07 17:47

You said that “Whatever amount of basis in nondeductible traditional IRA contributions does not get applied to the Roth conversion will remain with your traditional IRAs to be applied pro-rata to future traditional IRA distributions.”Could you elaborate a bit on this? If I follwed through on this, my %’s would be 43% traditional IRA and 57% ROTH.Also still wondering if i only did an in-service roll over on roth portion of 401k only,  does that eliminate the pro rata problem?  If so, I would wait to do the roll over on the traditional portion in January 2024.



Submitted by Alan - IRA critic on Fri, 2023-07-07 16:08

You haven’t done the in service rollover yet, so if you don’t do it the taxable amount of your conversion will not be affected. Or you could postpone that rollover until next January. Another option if you need funds is to simply take your distribution directly from the 401k as that would not affect the taxation of your conversion.



Submitted by john Styrbicki on Fri, 2023-07-07 16:42

Thank you for the response. I don’t need the funds. And I forgot to mention that I’m over 59 1/2 years old if that matters.  simply want to get my money to a money manager who I feel will do a much better job than my 401k options.Would I be subject to the pro rata rule for my 2023 back door conversion if I just do an in-service rollover on the Roth portion of my 401k? I checked with Fidelity and they confirmed that I can roll over just the Roth portion if I wish.



Submitted by Alan - IRA critic on Fri, 2023-07-07 17:46

If you only rolled over the Roth portion, the taxable amount of your conversion would not be negatively impacted. You only need to avoid adding to the balance of any traditional, SEP, or SIMPLE IRA.



Submitted by David Mertz on Fri, 2023-07-07 20:33

  • If you have funds in a traditional IRA at the end of 2023, basis in nondeductible traditional IRA contributions that does not get applied to your 2023 traditional IRA distributions, including the Roth conversion, does not disappear.  It remains with your traditional IRAs and will be shown on Form 8606 line 14 to be carried forward to line 2 of the next Form 8606 that you file.  Every time you do a distribution from your traditional IRAs in the future you’ll need to file until you have no more funds in traditional IRAs applied in the pro rata on that Form 8606.
  • If you wait until 2024 to roll over to a traditional IRA the traditional portion of your 401(k), your 2023 Roth conversion will remain as you intended, nontaxable if you converted the same amount as you contributed to the traditional IRA and you have no other funds in traditional IRAs at the end of 2023.


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