Author Topic: Pro-rata Rule & Conversions  (Read 2434 times)

Brokefuturedoctor

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Pro-rata Rule & Conversions
« on: April 12, 2017, 05:03:20 AM »
Hello all,

I was reading about the pro-rata rule recently for IRA conversions, and I was hoping for some clarification. My current understanding is that if I have any pretax IRA money (tIRA or rollover IRA) that the pro-rata rule would apply if I tried to do a backdoor IRA in the future. Is this true?

If this is true and I contribute to a company 401k in the future, would it be best to simply leave it in there until I retire and start a Roth conversion ladder?

I ask because I will need to use the Backdoor Roth method every year which requires conversion of a nondeductible tIRA to a Roth IRA. I won't qualify for the tIRA tax credit.

Thanks

SeattleCPA

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Re: Pro-rata Rule & Conversions
« Reply #1 on: April 12, 2017, 06:18:11 AM »
Hello all,

I was reading about the pro-rata rule recently for IRA conversions, and I was hoping for some clarification. My current understanding is that if I have any pretax IRA money (tIRA or rollover IRA) that the pro-rata rule would apply if I tried to do a backdoor IRA in the future. Is this true?

If this is true and I contribute to a company 401k in the future, would it be best to simply leave it in there until I retire and start a Roth conversion ladder?

I ask because I will need to use the Backdoor Roth method every year which requires conversion of a nondeductible tIRA to a Roth IRA. I won't qualify for the tIRA tax credit.

Thanks

To answer your "is it true?" question, yes.

To answer your question about leaving money you earn during your high income years inside a 401(k), yes.

BTW, I would guess you've overrating the Roth option. If you are currently broke and so have a low marginal tax rate, right now you should use a Roth and maybe even convert traditional IRAs to a Roth... but once you start making the sort of money where you're not qualifying for a Roth and have funds to make nondeductible contributions for a backdoor Roth, you mostly just want to get as much pretax money as possible into your tax deferred space. Your issue, in other words, aren't the relatively modest taxes you'll pay in retirement. Your issue (probably) is the crushing tax burden you'll shoulder during your working years.


Brokefuturedoctor

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Re: Pro-rata Rule & Conversions
« Reply #2 on: April 13, 2017, 07:13:08 PM »
I agree with your last sentiment; however, putting money in a tIRA wouldn't really help me because I won't qualify for the tax deduction. That is how I understand it from looking at the IRS website. In my mind, the only real option to avoid getting taxed twice essentially would be to do a backdoor Roth every year. This is after following the "usual" investing order of course.

Jrr85

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Re: Pro-rata Rule & Conversions
« Reply #3 on: April 14, 2017, 11:13:33 AM »
Hello all,

I was reading about the pro-rata rule recently for IRA conversions, and I was hoping for some clarification. My current understanding is that if I have any pretax IRA money (tIRA or rollover IRA) that the pro-rata rule would apply if I tried to do a backdoor IRA in the future. Is this true?

If this is true and I contribute to a company 401k in the future, would it be best to simply leave it in there until I retire and start a Roth conversion ladder?

I ask because I will need to use the Backdoor Roth method every year which requires conversion of a nondeductible tIRA to a Roth IRA. I won't qualify for the tIRA tax credit.

Thanks

Would love to know the answer to this.  Currently have money spread out across three different 401ks.  I'd like to roll them all into an IRA with Vanguard so I could have everything in one place in one account, but as far as I can tell, doing so would make doing a backdoor roth a big headache.  Essentially, I wouldn't be able to get all of my non-deductible ira contributions into a roth until I had paid taxes to convert all of my rollover IRA into a roth, which would obviously be pretty expensive.  I would assume that I misunderstand that because it would be such a stupid rule, but I guess tax laws are often stupid. 

Brokefuturedoctor

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Re: Pro-rata Rule & Conversions
« Reply #4 on: April 15, 2017, 08:11:25 PM »
According to SeattleCPA above, it is best to leave the money in company 401ks for the very reason that you mention. It essentially would eliminate the ability to do a backdoor Roth, so unfortunately how you and I understand it is correct

aj485

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Re: Pro-rata Rule & Conversions
« Reply #5 on: April 21, 2017, 05:43:56 PM »
I was reading about the pro-rata rule recently for IRA conversions, and I was hoping for some clarification. My current understanding is that if I have any pretax IRA money (tIRA or rollover IRA) that the pro-rata rule would apply if I tried to do a backdoor IRA in the future. Is this true?

If this is true and I contribute to a company 401k in the future, would it be best to simply leave it in there until I retire and start a Roth conversion ladder?

I ask because I will need to use the Backdoor Roth method every year which requires conversion of a nondeductible tIRA to a Roth IRA. I won't qualify for the tIRA tax credit.

Sorry to be late to the party.  As already mentioned to you, you do have to pay taxes pro-rata based on the total of all your tIRAs.  However, if you have access to a 401(k) plan, you are happy with the investment choices and fees that the 401(k) plan charges, and your 401(k) plan accepts rollovers, you do have the option to roll all of your tIRAs into the 401(k) plan - leaving you with no tIRA other than the non-deductible contribution that you would make every year.  That way, you could still do a back-door Roth each year.