Pro rata rule for Roth IRA conversion

Submitted by J Sampson on Fri, 2023-10-06 12:00

I want to complete a partial Roth conversion but first improve my situation regarding pro rata rule for the amount that will be taxable. I have multiple accounts that are several years old:

-Workplace 401(k)
-Traditional IRA ($100,000 balance) with non-deductible contributions of $50,000
-Rollover IRA #1 $210,000 balance (all pre tax)
-Rollover IRA #2 $160,000 balance (all pre tax)

In 2023, I completed direct rollovers so that Rollover #1 and Rollover #2 are now in the workplace 401(k). That reduced my aggregate IRA balance so the taxable percentage is now much smaller when determining the pro rata rule for a Roth conversion. This is because iRAs are treated separately from 401(k)s.

In order to use this better pro rata percentage (50,000 / 100,000 vs. 50,000 / 100,000 + 210,000 + 160,000) for the non-taxable amount, should I wait to complete a Roth conversion in 2024, or can it work for 2023 tax year? I was uncertain when trying to calculate this in form 8606.

Thank you



Submitted by David Mertz on Fri, 2023-10-06 12:45

With only $100,000 now in traditional IRAs of which $50,000 is basis in nondeductible contributions, 50% of the Roth conversion taxable no matter when you do the conversion.  The amounts that you moved to 401(k) will not appear on the Form 8606.  You would time the Roth conversion(s) based on whichever year you want to realize the taxable income from the conversion.

Submitted by William Tuttle on Sat, 2023-10-07 00:58

  • Nothing prevents you from rolling over the pre-tax and only the pre-tax balance in the traditional IRA this year. The sooner the better.
  • The rollover amount would be the total pre-tax balance in all traditional, SEP and SIMPLE IRA accounts. This would be the total balance – total non-deductible basis. It is important that you do not rollover any non-deductible basis to the 401k. It is not allowed.
  • Then you would be free to make a 2023 non-deductible contribution and a Roth conversion of the entire balance including any minor earnings. Only the earnings will be taxable.
  • It is important to do the rollover first, because Roth contributions can no longer be recharacterized.

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