pro rata rules
Tax payer owns a TIRA consisting of all pretax contributions. I’ve read that if a taxpayer wishes to make a post tax contribution to a TIRA and then convert it to a Roth, in order to avoid the application of the pro rata rules, he should first roll the existing IRA to his 401k.
In order to avoid the pro rata rule, does the timing of the rollover to the 401k matter? Can the rollover be done in the same tax year and after the contribution and subsequent Roth conversion? Can the rollover be done in the same tax year and before the contribution and subsequent Roth conversion?
Separate but related question: imagine the taxpayer has no TIRA and the taxpayer wants to make a post tax contribution to a TIRA and then convert it to a Roth. The taxpayer also has an old 401k and wants to roll it to a TIRA. To avoid the application of the pro rata rule, can the rollover be done in the same tax year and after the contribution and subsequent Roth conversion? Can the rollover be done in the same tax year and before the contribution and subsequent Roth conversion?
Permalink Submitted by Alan - IRA critic on Wed, 2024-09-04 17:36
Because a rollover to a 401k may hit a snag, it is recommended to complete that rollover of the pre tax IRA value to the 401k before doing the conversion. This is not a requirement but is recommended because if the rollover fails after you already converted the IRA basis, your conversion will be mostly taxable.
So if you plan to contribute and convert prior to the 401k rollover, you need to be entirely sure that the 401k plan will accept the IRA rollover. 401k plans are concerned that they might receive IRA basis by mistake, and some of them therefore will only take rollovers from a rollover IRA, and others may require you to certify that the rollover contains no IRA basis (non deductible contributions).
Permalink Submitted by Thomas Ferry on Thu, 2024-09-05 13:07
Thank you
What about the following?
Imagine the taxpayer has no TIRA and the taxpayer wants to make a post tax contribution to a TIRA and then convert it to a Roth. The taxpayer also has an old 401k and wants to roll it to a TIRA. To avoid the application of the pro rata rule, can the rollover be done in the same tax year and after the contribution and subsequent Roth conversion? Can the rollover be done in the same tax year and before the contribution and subsequent Roth conversion?
Permalink Submitted by Alan - IRA critic on Thu, 2024-09-05 18:30
The rollover cannot be done in the same tax year because it will then be included in the year end IRA balance, which will result in any conversion being mostly taxable. If the rollover is done in the year after the conversion, the conversion tax will not be affected, but then the taxpayer would not be able to do back door Roth conversions in and after the year of the rollover.
To avoid this, the 401k could simply be left in place or rolled into a new employer 401k if there is one.