[Help with Backdoor Roth pro-rata calculation]

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calvin111
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[Help with Backdoor Roth pro-rata calculation]

Post by calvin111 » Sun Jan 12, 2020 10:47 pm

[Moved into a new thread from: Help with establishing a Roth IRA for future Backdoor Roth conversions --admin LadyGeek]

I have a similar situation, can you guide me ?

I have Rollover IRA in 12/31/2019 of 12K. If I try to do backdoor roth then it will be considered as pro-rata. So I am planning to move it to my new employer 401K so that I can do backdoor roth. Then I am planning to invest 6K in tIRA for 2019 and convert it to rIRA this year. But given that by end of 12/31/19 I had a rollover IRA balance of 12K will it be considered for pro-rata calculations ? or not because before the conversion I made by Rollover IRA balance to be 0 (by moving to 401K).

So in this case, I will not contribute for 2019 and just contribute for 2020 and that backdoor for that (because for 2020 I will not have any Rollover IRA).

Simply asked, if we had a rollover IRA on 12/31/19, can we contribute to 6K tIRA in Jan 2020 and do backdoor roth for that much amount without the pro-rata rule impacting it. Or we cannot do it without pro-rata rule impacting it.

Silk McCue
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Re: [Help with Backdoor Roth pro-rata calculation]

Post by Silk McCue » Mon Jan 13, 2020 10:04 am

A 2019 Backdoor Roth performed in 2020 is unaffected by the balance in an IRA held on 12/31/2019. It would be affected by any balance in an IRA on 12/31/2020. To be clear you can perform a 2019 Backdoor Roth this year (contribution must be made by 4/15) without running afoul of pro rata rules.

Cheers

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Duckie
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Re: [Help with Backdoor Roth pro-rata calculation]

Post by Duckie » Mon Jan 13, 2020 10:59 pm

calvin111 wrote:]I have Rollover IRA in 12/31/2019 of 12K. If I try to do backdoor roth then it will be considered as pro-rata. So I am planning to move it to my new employer 401K so that I can do backdoor roth. Then I am planning to invest 6K in tIRA for 2019 and convert it to rIRA this year. But given that by end of 12/31/19 I had a rollover IRA balance of 12K will it be considered for pro-rata calculations ?
The backdoor Roth method is a two-step process: contribution and conversion. Only the conversion step triggers the pro-rata rule. So if you contribute now for 2019 and file IRS Form 8606 for that non-deductible contribution you will not have to consider the Rollover IRA because you did not convert in 2019. (You'll probably only have to fill out lines 1, 2, 3, and 14.) Once you have rolled the Rollover IRA into your 401k you can convert. But that conversion obviously will happen in 2020.

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calvin111
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Re: [Help with Backdoor Roth pro-rata calculation]

Post by calvin111 » Wed Jan 15, 2020 1:44 am

Thank you folks ! you are the best. Fidelity doesnt clearly answer such questions. My CPA is a friend of mine and some of these are complex for him to answer.

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calvin111
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Re: [Help with Backdoor Roth pro-rata calculation]

Post by calvin111 » Wed Jan 15, 2020 2:12 am

Folks, one more question. The rule says that the balance at the end of the year in Rollover IRA should be 0 for pro-rata rule to not be in affect.

So

1) 12/31/2019, I had 10K in rollover IRA.
2) today 1/14/2020, I will keep money (12K) in rollover IRA.
3) tomorrow 1/15/2020, I will open a tIRA, contribute 6K for 2019, and 6K for 2020.
4) day after tomorrow 1/16/2020, I will do backdoor roth conversion of full 12K from tIRA to rIRA
5) 12/25/2020, I will move 10K in Rollover IRA to my 401k

Will this work ? It will not create a pro-rata rule issue because by 12/31/2020 my rollover IRA will be $0

The primary reason is that this way I can keep 10K in rollover IRA and 12K in roth IRA for full year and do trading which I cannot do in 401K account easily.

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celia
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Re: [Help with Backdoor Roth pro-rata calculation]

Post by celia » Wed Jan 15, 2020 5:25 am

calvin111 wrote:
Wed Jan 15, 2020 2:12 am
1) 12/31/2019, I had 10K in rollover IRA.
2) today 1/14/2020, I will keep money (12K) in rollover IRA.
Where did the extra $2,000 come from during the last 14 days? If you were able to get that from growth, maybe you should also convert the $12K and get more growth going on in your soon-to-be Roth.

As far as leaving the $12K in the Rollover IRA until later in the year, you could do what you are proposing (move it to your 401K after you convert) but you are taking a risk that you might forget or something could happen to you in the meantime. You also need to allow about a month for the transfer to take place (and that could go wrong). The Rollover account value meanwhile could also grow some more or shrink in value.

Silk McCue
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Re: [Help with Backdoor Roth pro-rata calculation]

Post by Silk McCue » Wed Jan 15, 2020 8:01 am

calvin111 wrote:
Wed Jan 15, 2020 2:12 am

5) 12/25/2020, I will move 10K in Rollover IRA to my 401k
Do not wait to rollover to the 401k. Too much can go wrong/change between now and 12/25/2020. You could lose your job, you could change jobs etc.

Perform the rollover as your first step. Start that today. Then perform the Backdoor Roth.

Cheers

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