Pro Rata Rule for MULTI YEAR IRA conversion
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Level 1

Pro Rata Rule for MULTI YEAR IRA conversion

Good morning,

 

We have a very confusing situation. So I understand the Pro Rata rule to some extent but was not sure how it would apply to our case here:

 

I have a big sum of pretax money in my traditional IRA (rolled over from a previous 403B) as well as about 5500 of non deductible traditional IRA investment in the same account. I understand under the Pro Rata rule, the amount converted would be proportionally taxed based on the ratio of non deductible to total amount of money in our traditional IRA, BUT was not sure how this would apply for multi year conversions of the amount to the ROTH.

 

For example if we converted half of the amount and paid taxes etc this year, when calculating for the following year for the next conversion to ROTH, do I simply deduct the amount of taxable money converted, and  non taxable amount converted using pro rata ratio, and refile for the following year using the "left over" non deductible and the rest of the money that will be taxable?

Just trying to not get double taxed and this rule is very confusing esp about what happens in subsequent years for the left over amount! Will appreciate any experience or feedback anyone in the community has!

2 Replies
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Level 15

Pro Rata Rule for MULTI YEAR IRA conversion

The pro-rata calculation is done separately each year.  Whatever small amount of the first year's conversion is nontaxable reduces the amount of basis in nondeductible traditional IRA contributions that remain in your traditional IRAs by the same amount.  The amount of basis that carries forward to the next year appears on line 14 of the Form 8606.

 

Until you have no money left in traditional IRAs, you'll always have some amount of basis in nondeductible traditional IRA contributions that remains in your traditional IRAs.  Once you have distributed or converted all amounts from your traditional IRAs, all of your basis will have been applied as nontaxable amounts of distributions or conversions.

 

For example, if you have $5,500 in basis and you convert $50,000 (half of your traditional IRA balance) to Roth, leaving a year-end balance in traditional IRAs of $50,000, $2,750 of the conversion will be nontaxable, leaving $2,750 of basis on Year1  Form 8606 line 14.  If you convert everything else the following year leaving a $0 year-end balance in traditional IRAs, the $2,750 from line 14 of the Year1 Form 8606 carries forward to line 2 of the Year2 Form 8606 to be used in calculating a nontaxable amount of $2,750 for that conversion leaving $0 on line 14 of the Year2 Form 8606.

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Level 15

Pro Rata Rule for MULTI YEAR IRA conversion

once you study 8606 and understand what it does, it's pretty simple actually.

However, this may take several readings !

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