Pro-rata rule ??

Forum|Forum|4 years ago
November 17, 2021
1 reply
15 views

Every year I will contribute to my traditional IRA and do a back-door roth IRA conversion.

For 2021, I contributed $6000 to this back-door Roth IRA.

1 month later, my company was acquired by another company.

And I rollover my 401K (total $112K : (i) pre-tax 401K $97K (ii) After-tax Roth $14K (iii) Pre-tax Roth $1K) into a rollover IRA ( $97K from source[i] ) and roth IRA ( $15K from source [ii] and [iii] ) .

Today I had a chat with my company's financial advisory company, The person told me of the pro-rata rule and I may be subjected to taxation on the $6K.

Since it is no longer possible to revert the contribution of $6k in back-door roth ira.

I have 2 choices

[a] Pay taxes on $6k

[b] Rollover $97k into my new company's 401K plan.

Is what I am being told true ? Only 2 choices available ?

macuser_22

Alumni - Champ

True. Unless your Traditional IRA value (aggregate total of all IRA accounts) is zero at years end then it will be partly taxable.

You can NEVER withdraw ONLY the nondeductible part - it must be prorated over the entire value of ALL Traditional IRA accounts which include SEP and SIMPLE IRA's. (For tax purposes you only have ONE Traditional IRA which can be split between as many different accounts as you want, but for tax purposes they are all added together).

For example using rough figures: if you had $60K of nondeductible contributions in an IRA with a total value of $600K (10:1 ratio), then when you take a $60K distribution from any IRA account $6,000 would be nontaxable and $54,000 would be taxable (same 10:1 ratio) , with the remaining $54K of basis staying in the IRA for future distributions. As long as there is any money in the IRA, there will be some basis.

TurboTax will ask for your non-deductible "basis" and then the *Total Value* of *all* Traditional IRA, SEP and SIMPLE accounts as of Dec 31, of the tax year. That is so the prorating of the basis can be properly proportioned between the current years distribution and the remaining IRA value. That is done on the 8606 form.

**Disclaimer: This post is for discussion purposes only and is NOT tax advice. The author takes no responsibility for the accuracy of any information in this post.**

amyonghweeAuthor

Level 5

When TurboTax asks for *Total Value* of *all* Traditional IRA, SEP and SIMPLE accounts as of Dec 31, of the tax year, does this include Rollover IRA ?