roll over 401k to an IRA after roth conversion

[kim_hung_lo]

I had an IRA account which contained only after tax contributions. That was my only traditional IRA account. Subsequently, I did a Roth conversion to put the whole amount in to my Roth IRA account. Now, after my retirement, if I roll over my pre-tax IRA into another traditional IRA account and do another Roth conversion later this year, I understand that the pro-rata rule will apply. But, I do have a few questions:

(1) When the pro-rata rule apply, what is the basis? It seems to be that it will be based on the IRA portfolio at the end of the year. But, due to the earlier Roth conversion, I do not have any money in the IRA account that had my after tax money. So, does it mean, at the end of the year, the IRA portfolio has only pre-tax money and, therefore, every single penny I conversed were taxable? If so, does it mean that my after tax money is being double taxed?

(2) I tried to look up information from the web. It is saying I am not double taxed. The IRS only allows the Roth conversion to be done proportional to the assets in the IRA portfolio.  If this is the case, does it mean that some of the amount in the IRA account into which I roll over pre-tax 401k will become after tax? (I do not think the account with the earlier Roth conversion will get some money back.)

Please help answer these questions.  I am really lost. 

[baldietax · Accepted solution]

If you already converted your IRA with after-tax contributions to Roth, then you have no remaining basis in your IRA.  Now if you rollover your 401k with only pre-tax money and earnings, to an IRA, and convert that to Roth, it will be entirely taxable.

"If so, does it mean that my after tax money is being double taxed?" - can you clarify what after tax money you are referring to here since you previously converted it all to Roth already; are you planning on doing more non-deductible IRA contributions and converting those to Roth i.e. backdoor Roths?  Note if you have no 'earned' income in retirement, then you can't make IRA contributions.

But you will not be "double taxed".  Say you try to do backdoor Roth conversions while also having pre-tax IRA balance (and if you have multiple Traditional IRA accounts they are just considered as one), then the conversion is considered taken in pro rata manner from both your pre-tax and after-tax (basis).  The portion of the conversion that is after-tax money is converted tax-free, and you pay tax on the pre-tax portion; your remaining after-tax money / basis is carried forward, and will be converted tax-free at a later date - but it won't fully convert until the IRA has a zero balance, so it's just a question of timing.

[dmertz · Accepted solution]

You haven't said which year you did the first Roth conversion that you mentioned.  Any amount that you roll over to a traditional IRA from your 401(k) in 2026 will result in the pro rata calculation being done on any Roth conversions done in 2026 (and any Roth conversions done in future years until you have no traditional IRA funds left at year-end).  The relative timing of rollovers or Roth conversions done in 2026 has no effect on the calculation.

Basis in nondeductible traditional IRA contributions does not belong to any particular dollars or investments in your traditional IRAs, it belongs to your traditional IRAs in aggregate.

[kim_hung_lo]

Sorry. I mistyped something in my original questions. Thing thing is like this:

I am working. I have non-deductible IRA which contains only after tax money. And I have pre-tax money in 401k. Now, I have converted all my non-deductible IRA to Roth IRA. So, there is no IRA money at all. Now, if I retire later this year, I am considering to roll over the 401K (I mistyped this as IRA in my original post, sorry) to a traditional IRA and thinking of convert part of it to Roth later this year. With this, I was trying to ask the two questions I posted in the original post. The questions are:

(1) When the pro-rata rule apply, what is the basis? It seems to be that it will be based on the IRA portfolio at the end of the year. But, due to the earlier Roth conversion, I do not have any money in the IRA account that had my after tax money. So, does it mean, at the end of the year, the IRA portfolio has only pre-tax money and, therefore, every single penny I conversed were taxable? If so, does it mean that my after tax money is being double taxed?

(2) I tried to look up information from the web. It is saying I am not double taxed. The IRS only allows the Roth conversion to be done proportional to the assets in the IRA portfolio.  If this is the case, does it mean that some of the amount in the IRA account into which I roll over from pre-tax 401k will become after tax?

After more thinking, I have a third question.

(3) If I do a partial rollover directly from the 401K to Roth IRA, does this avoid the complication of pro-rata rule as the money that is rolled over to Roth from 401K is never put in a traditional IRA?

Sorry for my typo in my original post.

[dmertz]

My original reply applies to #1 and #2 without modification.

As for question #3, you are correct that for a taxable rollover funds from the traditional 401(k) directly to a Roth IRA, Form 8606 is not involved and has no effect on the calculation taxable amount of the traditional IRA to Roth IRA conversion.  For a direct rollover from a traditional 401(k) to a Roth IRA, make sure that the 401(k) plan understands that the destination account is a Roth IRA so that they show the correct taxable amount in box 2a of the Form 1099-R.