Backdoor Roth, Mega backdoor roth and the Pro-rata rule

Non-investing personal finance issues including insurance, credit, real estate, taxes, employment and legal issues such as trusts and wills
Post Reply
Topic Author
freelancer
Posts: 24
Joined: Sat Jan 10, 2015 2:55 pm

Backdoor Roth, Mega backdoor roth and the Pro-rata rule

Post by freelancer » Sat Apr 16, 2016 3:29 pm

I'm looking for some advice about the pro-rata rule.. and I'm afraid Fidelity might have messed things up a little for me.

In 2015, I wanted to do my first backdoor and mega backdoor roth conversions. Fidelity created a new TIRA account for me. I added $5500 to it and immediately converted it to Roth IRA.

Now I also had $20,200 in an after tax 401K which I also wanted to roll over to Roth IRA. $200 of that was capital gains. Fidelity rolled over $20K to roth IRA and the remaining $200 to the TIRA.

On Dec 31, 2015, The TIRA therefore had $200.

Does this screw up the conversion in some way for 2015? Will the Pro-rata rule be invoked here?

For 2016, should I convert this $200 to Roth by paying taxes on it before doing any conversions this year so that this same thing doesn't happen again?

Thanks a lot for the advice!

User avatar
tfb
Posts: 8156
Joined: Mon Feb 19, 2007 5:46 pm
Contact:

Re: Backdoor Roth, Mega backdoor roth and the Pro-rata rule

Post by tfb » Sat Apr 16, 2016 4:20 pm

freelancer wrote:On Dec 31, 2015, The TIRA therefore had $200.

Does this screw up the conversion in some way for 2015? Will the Pro-rata rule be invoked here?
The Pro-rata rule will be invoked but it's not a big deal. It only means you pay tax on less than $200 (say $190) on your conversion. When you convert this $200, you will pay tax on the remainder (say $10). You end up no worse off. Next time when you do a mega backdoor Roth, just keep it simple and send everything straight to Roth.
Harry Sit, taking a break from the forums.

Topic Author
freelancer
Posts: 24
Joined: Sat Jan 10, 2015 2:55 pm

Re: Backdoor Roth, Mega backdoor roth and the Pro-rata rule

Post by freelancer » Sat Apr 16, 2016 5:35 pm

Thanks a lot for your reply. That is a relief. I'm not sure if I'm reporting the conversion correctly though .. because currently in the 8086 I'm not paying any tax on the $267 (its actually $267, not $200):

Image

User avatar
Duckie
Posts: 6898
Joined: Thu Mar 08, 2007 2:55 pm
Location: California Bay Area

Re: Backdoor Roth, Mega backdoor roth and the Pro-rata rule

Post by Duckie » Sat Apr 16, 2016 5:59 pm

freelancer wrote:I'm not sure if I'm reporting the conversion correctly though .. because currently in the 8086 I'm not paying any tax on the $267 (its actually $267, not $200)
You filled out Part I of the form to track your basis. Now you need to fill out Part II to see what happens after the conversion. See lines 16 to 18 on the form.

Topic Author
freelancer
Posts: 24
Joined: Sat Jan 10, 2015 2:55 pm

Re: Backdoor Roth, Mega backdoor roth and the Pro-rata rule

Post by freelancer » Sat Apr 16, 2016 6:27 pm

My mistake.. I'll add the rest of the form here.. everything after 21 is 0:

Image

User avatar
Duckie
Posts: 6898
Joined: Thu Mar 08, 2007 2:55 pm
Location: California Bay Area

Re: Backdoor Roth, Mega backdoor roth and the Pro-rata rule

Post by Duckie » Sun Apr 17, 2016 3:40 pm

freelancer wrote:I'll add the rest of the form here.
And now you see line 18 with $264 that will transfer to line 15b of your 1040 form.

Post Reply