Roth Conversion Pro Rata Calculation

Submitted by MIKE KRUCHTEN on Tue, 2024-01-23 20:00

Client made a 2023 T IRA contribution for $6,500 then converted immediately in early 2023. At the time no other T IRA’s existed.

Client received an unexpected rollover from a past pension and rolled lump sum into a T IRA in Dec 2023.

She is aware majority of the Roth conversion of $6,500 will be taxable but I’m unsure of the formula.

5498 for 2023 shows $29,397 (amount of pension rollover plus some min interest).

I believe we have to add the T IRA contribution of $6,500 to this figure resulting in 18.1% of $6,500 conversion to be tax free which is taking 5498 amount plus the T IRA contribution made earlier in the year dividing by Roth conversion amount of $6,500.

or

Divide $6,500 by 5498 value of $29,397 resulting in 22.1% to be tax free, I think this is wishful thinking!!

Not that client would ever due this but how would IRS ever put together the first calculation unless their systems are capable of such?



Submitted by David Mertz on Tue, 2024-01-23 20:26

  • 18.1% is correct.  The calculation is done on Part I of Form 8606.
  • The nondeductible traditional IRA contribution for 2023 is required to be reported on line 1 of the 2023 Form 8606.  That along with the 2023 Form 1099-R for the distribution from the traditional IRA and the 2023 Form 5498 reporting the year-end value in the traditional IRA provides all of the information needed to do the pro rata calculation.

Submitted by Alan - IRA critic on Tue, 2024-01-23 20:28

Form 8606 will add any distributions (the conversion) to the year end balance and the total goes on line 9. This results in 18.11% of the conversion being non taxable. The IRS also gets the 5498 and the 1099R for the conversion, so they have all the info needed to check the Form 8606 filed. But I doubt that their automation automatically does this, since they rarely if ever question the accuracy of the form.

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