Partial Roth Conversion Over 2 Years – Pro-Rata Rule?

I currently have $130k in a traditional IRA. I want to convert it into a Roth IRA over the next two years by converting $65k/year. Does the pro-rata rule come into play during the first or the second year? It only happens when there’s a mix of traditional/roth IRAs, so the second year right? And does that increase my tax liability?

I was originally just calculating my new tax liability by adding the $65k to my gross income each year. But someone mentioned the pro-rata rule and now I’m confused and want to make sure I’m doing this right. Thanks in advance!



The pro rata rule only affects your conversions if you have basis in your TIRA from non deductible contributions. You did not indicate having any basis. If you have no basis in your TIRA, then there is nothing to pro rate. You are simply taxed on the amount you convert each year.
Now if you did have basis in your TIRA that you documented on Form 8606 when you made non deductible contributions in some prior year, if you do a partial conversion in year 1 of 50% of the balance, then 50% of your basis is applied to reduce taxation of the conversion. Then the remaining basis left over is applied to the second conversion in the following year, so that you will have the same taxable amount each year, assuming that the account value remains about the same.



Most of my contributions are of the deductible type, but last year my MAGI was high enough that I only qualified for a partial IRA deduction. I don’t know if that means part of it was nondeductible? I don’t think I filed Form 8606, but I do it all online through a website, so I’m not sure what goes on behind the scenes. Thank you so much!



Your tax return should have included a Form 8606 to report the non deductible portion. You can send in a 2021 stand alone 8606 to document that contribution. In other words, the deduction claimed plus the non deductible contribution should equal the total contribution. Therefore, you do have a small basis in your TIRA, therefore a small portion of your first and second year conversions will be non taxable. Form 8606 does the calculations, so the same form on which you report non deductible contributions also is used to report the conversions in the year you do them.



Add new comment

Log in or register to post comments