Help with Rollover IRA and pro-rata rule generated basis

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Topic Author
RandalThor
Posts: 60
Joined: Tue May 08, 2007 9:46 pm

Help with Rollover IRA and pro-rata rule generated basis

Post by RandalThor » Sun Feb 09, 2020 7:17 pm

Hello,

I ran into the pro-rata rule in a prior year when I converted after tax dollars from a Traditional IRA to a Roth, not realizing the wonderful pro-rata rule would wreak some havoc :oops:

That being said, I now have a Rollover IRA with some basis in it now because of the tax I ended up paying when I did the after tax dollar conversion from the Traditional IRA.

I now have an opportunity to move the Rollover IRA back into a 401(k) account, which would get rid of this problem if I need to leverage a Traditional IRA again for a "backdoor" Roth in the future. But, now that there is some basis in the Rollover, and the 401(k) account will only take in pre-tax money, I can't move it all to the 401(k). My thought would be to move that basis amount to the Roth at the same time as moving the remainder of the Rollover pre-tax money to the 401(k).

Has anyone ever attempted to do this before? Is this possible? Any suggestions on how to handle this?

Thanks for the help.

Rand

retiredjg
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Joined: Thu Jan 10, 2008 12:56 pm

Re: Help with Rollover IRA and pro-rata rule generated basis

Post by retiredjg » Sun Feb 09, 2020 7:34 pm

Sell everything in the account and put it in money market. Send the pre-tax money to the 401k. Leave an amount at least equal to the basis in the tIRA. Be sure you do not send any of the basis to the 401k. After the pre-tax money is in the 401k, convert the basis to IRA.

This is allowed although some plans are wary of accepting money from co-mingled accounts.

Uniballer
Posts: 274
Joined: Thu Apr 20, 2017 9:55 am

Re: Help with Rollover IRA and pro-rata rule generated basis

Post by Uniballer » Sun Feb 09, 2020 7:38 pm

The simplest option, if you are sure that you can move the pre-tax money to your 401K, is to convert the basis to Roth right away, and then complete moving everything left (the pre-tax money) before the end of the year. If you miss the end of year deadline you will be in pro-rata hell again.
Last edited by Uniballer on Sun Feb 09, 2020 7:45 pm, edited 2 times in total.

HomeStretch
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Joined: Thu Dec 27, 2018 3:06 pm

Re: Help with Rollover IRA and pro-rata rule generated basis

Post by HomeStretch » Sun Feb 09, 2020 7:38 pm

RandalThor wrote:
Sun Feb 09, 2020 7:17 pm
My thought would be to move that basis amount to the Roth at the same time as moving the remainder of the Rollover pre-tax money to the 401(k).

Has anyone ever attempted to do this before? Is this possible? Any suggestions on how to handle this?
Yes, this is a good way to clear the way for a future backdoor Roth that does not incur pro-rated taxes.

Suggest you rollover the pretax IRA balance into your 401k first. When completed, then convert the basis remaining in your tIRA to a Roth IRA.

You should have completed Form 8606 to document your basis. If not, correct this (by submitting the Form 8606(s)) before doing the rollover/conversion.

Topic Author
RandalThor
Posts: 60
Joined: Tue May 08, 2007 9:46 pm

Re: Help with Rollover IRA and pro-rata rule generated basis

Post by RandalThor » Thu Feb 13, 2020 1:24 pm

Thank you retirdjg, Uniballer, and Homestretch! Your input is very much appreciated. Thank you for stepping me through it. I've been doing some research and it looks like we need to correct the basis that we gained in the Rollover after we converted from the Traditional IRA last year from that pro-rata rule. I think once that is done I can start the rollover back to the 401k and then the conversion to the Roth.

Rand

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