Author Topic: Pro Rata Rule - Does it Apply to us?  (Read 1847 times)

LiseE

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Pro Rata Rule - Does it Apply to us?
« on: March 05, 2015, 07:05:51 AM »
I've been reading about the Roth Backdoor conversion as my hubby and I are high income earners and cannot contribute to a Roth IRA directly. 

These are our current investment assets:

Hubby 401K - 250K
My 401K - 370K
Inherited IRA - 110K

If we open a Traditional IRA and Convert to Roth, do any of the above assets apply to the Pro Rata Rule? 

Also, I plan on leaving my job in two years.  At that time I can roll my 401K balance into a Traditional IRA ... can I convert the entire amount to Roth at that time?  Also, how does this change our investment status regarding the Pro Rata Rule?


zurich78

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Re: Pro Rata Rule - Does it Apply to us?
« Reply #1 on: March 05, 2015, 08:18:49 AM »
No expert here, but, from my understanding of pro rata, the funds in your inherited IRA will apply to pro rata rule. 

You can avoid pro rata by rolling your IRA funds in to one of your 401K accounts.

At least that's what my tax guy told me when I started doing back door roth conversions.

seattlecyclone

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Re: Pro Rata Rule - Does it Apply to us?
« Reply #2 on: March 05, 2015, 08:28:43 AM »
401(k)s are completely separate from IRAs. The pro-rata rule for IRA withdrawals doesn't look at 401(k) balances at all.

Unless you inherited the IRA from a deceased spouse, the inherited IRA shouldn't come into the picture here either. See http://thefinancebuff.com/inherited-ira-and-roth-conversion-pro-rata-rule.html for more information.

If you later roll over your 401(k) into a traditional IRA, that would bring the pro-rata rule into play. If you wish to make backdoor Roth contributions after that time (based on income from a side gig or your spouse's job if he isn't yet retired), it would be best to leave the 401(k) funds where they are. As to your question about whether it's permissible to convert the entire 401(k) to Roth when you leave your job, that is allowed, but it would require you to pay tax on the entire $370k balance that year, so it probably isn't the greatest idea.

LiseE

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Re: Pro Rata Rule - Does it Apply to us?
« Reply #3 on: March 05, 2015, 09:21:53 AM »
Quote
Unless you inherited the IRA from a deceased spouse .....

Thanks for your reply .. I inherited the IRA from my brother.  So if we start the backdoor conversion process now we do not have anything that applies to the Pro Rata Rule.