Pro-rata rule ??

[amyonghwee]

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]

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.

[amyonghwee]

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 ?

[fanfare]

Rollover IRA really has no meaning any more, except for that fact that you funded it with a rollover.

Yes, it is counted among your IRAs.

[fanfare]

@amyonghwee 

Option (c) is to ask the custodian to return the Roth contribution plus earnings to you before your tax return due date.

The earnings, if positive, will be taxed as income in the year for which you made the Roth contribution.

There is no penalty.

[fanfare]

hmmm...  option (c) may not be available because you did a conversion, not a contribution.

You'll have to talk to the custodian.