Mega Back Door Roth Conversion and Pro Rata Rule
Taxpayer has $500,000 in 401k which contains $400,000 of Roth 401k and $100,000 of Pre tax 401k
They are making contributions to the plan 100% to the Roth 401k.
They have excess cash such that they can make an additional $20,000 of after tax contributions in 2024.
The goal is to get that $20,000 into the Roth 401k.
If plan allows in service conversion can they roll the after tax contributions to their Roth 401k – and pay no tax?
Does fact that they have an IRA with $75,000 all pretax contributions change the answer?
If plan does not allow conversion from after tax to Roth 401k is there another way to get the after tax monies into the Roth without triggering pro rata rule?
Thx as always
Howard
Permalink Submitted by Alan - IRA critic on Wed, 2024-05-29 03:40
Howard, as long as the plan supports in plan Roth rollovers (IRR), the TP can roll the 20k plus any gains on those contributions to the Roth 401k. Only the gains will be taxable.
If the plan does not offer IRRs, then perhaps the after tax contributions and their gains can be rolled to a Roth IRA while still employed.
The existence of the pre tax TIRA is irrelevant.
With either an IRR or a roll out to the Roth IRA, the sooner or more often these transactions are done, the less time for the after tax contributions to generate taxable gains before the IRRs. Some plans allow immediate IRRs after each pay period and some may limit the number to quarterly or some other frequency. When requesting an IRR the TP should be clear that the IRR comes only from the after tax subaccount in the plan. If this is done on line and the source of the rollover is not very clear, TP should call in to request the IRR.