how to calculate pro-rata

[wtang922]

Hello,

I have both a traditional ira and a roth ira.  The traditional ira is simply a transfer medium to put money in and the money then immediately go thru ira back door conversion to the roth ira, leaving the balance in the traditional ira to be $0 always.  I this is all fine and nice and no complication here.  I enjoy the tax free money that were deposit in my ira going forward.

Now with my wife, that is a whole different story.  I just now learn about "pro-rata" after we deposited 7k into one of her traditional ira and went through back door conversion to get the 7k into her roth ira. We were thinking that the entire 7k, just like mine, would be consider as none-deductible money.  But after talking to some folks look like that is not true because of pro-rata.  So how do I calculate pro-rata?

Let say my wife has 3 ira (including the one that we just converted to roth and has 7k) with a total of 107k.  Here is how I calcluated pro-rata: 7k/107k = 6.5%.  6.5% X 7000 = 420.  So $420 would be consider  tax free dollars and $6580 would be consider taxable dollars.  That means of the 7k we converted from her traditional ira to her roth ira, we need to pay tax on $6580.  Some one please chime and let me know if my calculation is correct.

[SusanY1 · Accepted solution]

I would say that, yes, your calculation is correct.   

I got very slightly different math of $430 and $6,570 but this could have been a typo on my end somewhere or some other minor difference somewhere else in the "mock" tax return I was working on.

TurboTax will do this math for you based on the information that you have entered. 

There is an excellent illustration of how to enter it into the program here: How to enter Backdoor Roth .

Of course in the illustration where you would normally enter $0 for the value of all Traditional IRAs on December 31, 2019, you will enter $107,000 (or the actual value) instead of $0.

[fanfare]

You must add back the Roth conversion amount to the year end balance, before calculating the divisor.

That's just the way it is.

See 8606 Line 8,9.

In any case, the tax software does all this arithmetic for you.

Keep a paper copy of 8606 showing your new basis Line 14.