Say you have money in a traditional IRA and attempted to do the Backdoor Roth conversion (put post-tax money into that Traditional IRA, then convert it to a Roth IRA). In this case, you would be subject to the Pro Rata rule since there was already money in the traditional IRA.
Let's use the amounts $15k originally in traditional (pre-tax) and added $5k (post-tax). If you move $5k into the Roth IRA, that means $3.75k (75%) was pre-tax and $1.25k (25%) was post-tax, meaning you would need to pay taxes on the $3.75k. The remaining money in your traditional IRA is $15k (11.25k pre-tax, 3.75k post-tax).
However, later on in the same year, you want to avoid / minimize the taxes from the Pro Rata rule, since the rule is based on the balance on your traditional IRA on Dec 31. Given that $5k was already "rolled over" into a Roth IRA earlier in the year:
- If you put the rest of the Traditional IRA ($15k) into the Roth IRA, does it matter that it happened in 2 separate transactions in the same year? Would you just be taxed on the 15k the same as if it was all done in one transaction, and do any gains affect this?
- Since you already moved $5k into the Roth IRA, is it too late to roll the pre-tax funds into an employer 401k to bring the traditional IRA balance down to $0?
