Back door roth, 401k rollover, pro rata rule?
I did a back door Roth earlier this year, the rest of my funds were in my 401k. I am considering rolling over a 401k to a traditional IRA next month. Will the pro rata rule come into play? If so, could that mean the backdoor Roth is taxable? Would it create any other issues on my new tradtional IRA making it taxable?
Permalink Submitted by Alan - IRA critic on Fri, 2021-07-30 15:47
If you roll the 401k into an IRA anytime this year, your conversion will be pro rated and become mostly taxable. If you wait until next year, your 2021 conversion will be non taxable since you will have a 0 balance in any non Roth IRA at year end, but then you will have the same issue next year. To avoid this problem, keep your 401k in place or roll it to your new 401k if your present employer accepts IRA rollovers. Another option if the rollover you are planning is small enough is to bite the bullet, do the rollover and pay the taxes on your conversions until all the pre tax dollars have been converted. You could reduce the current year taxes by only converting half of the new balance with the rest next year.
Permalink Submitted by David Wanja on Wed, 2021-08-04 16:58
If I made a non-decutible contribution to my IRA in 2020, then converted in 2021, and also moved my 401k to my Traditonal IRA in 2021. Realizing the pro-rata rule applies, can i move the IRA pre-tax dollars to my new 401k (as long as my plan allows it)? This should remove any pro-rata rules, correct?
Permalink Submitted by Alan - IRA critic on Wed, 2021-08-04 17:50
Yes, that is correct. It is safer to have done the rollover of the pre tax TIRA balance before converting, just in case the plan declines to accept the rollover or perhaps limits rollovers to rollover IRA accounts only, and your account is not a rollover IRA.
Permalink Submitted by David Wanja on Sat, 2021-08-14 22:51
Thank you and great point! The 401k will allow the pretax money to roll into the account. A follow up question, should I be concerned about the step transaction doctrine by doing this?
Permalink Submitted by Alan - IRA critic on Sat, 2021-08-14 23:02
Absolutely no concern. The IRS has “blessed” the back door Roth process when the TCJA was passed at the end of 2017, and before that the IRS never used the step transaction doctrine to invalidate a back door Roth conversion.
Permalink Submitted by David Wanja on Sun, 2021-08-15 02:10
Thank you!