Avoiding pro rata rule when doing back door roth

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
Topic Author
sokk55
Posts: 11
Joined: Mon Aug 30, 2021 10:26 am

Avoiding pro rata rule when doing back door roth

Post by sokk55 »

Hello.

I have a Rollover IRA in which I have consolidated all my past employer 401k at Fidelity. The funds are all pre-tax dollars.

To avoid dealing with the pro rata rule when wanting to do a back door Roth, should I roll my current funds of my Rollover IRA into my current employer 401k, then open up a regular Traditional IRA and contribute the max limit of $7000 for the year and then do the back door Roth?

My understanding of the pro rata rule is when you have an IRA with pre and post tax dollars that it can complicate the backdoor, but what if all the funds in a Rollover IRA is all pre-tax?

I understand my contributions into a traditional IRA to do the backdoor Roth is not tax-deductible aka post tax funds.
toddthebod
Posts: 5987
Joined: Wed May 18, 2022 12:42 pm

Re: Avoiding pro rata rule when doing back door roth

Post by toddthebod »

sokk55 wrote: Tue Apr 02, 2024 10:08 am Hello.

I have a Rollover IRA in which I have consolidated all my past employer 401k at Fidelity. The funds are all pre-tax dollars.

To avoid dealing with the pro rata rule when wanting to do a back door Roth, should I roll my current funds of my Rollover IRA into my current employer 401k, then open up a regular Traditional IRA and contribute the max limit of $7000 for the year and then do the back door Roth?

My understanding of the pro rata rule is when you have an IRA with pre and post tax dollars that it can complicate the backdoor, but what if all the funds in a Rollover IRA is all pre-tax?

I understand my contributions into a traditional IRA to do the backdoor Roth is not tax-deductible aka post tax funds.
As soon as you make your contribution, you have a mix of pre-tax and after tax dollars, and the IRS considers all of your non-Roth IRAs as one for the sake of that calculation.
User avatar
retired@50
Posts: 12983
Joined: Tue Oct 01, 2019 2:36 pm
Location: Living in the U.S.A.

Re: Avoiding pro rata rule when doing back door roth

Post by retired@50 »

sokk55 wrote: Tue Apr 02, 2024 10:08 am ... should I roll my current funds of my Rollover IRA into my current employer 401k,...
This ^^^ is what I'd do, unless your current 401k is loaded with high fees and high expense ratio funds to choose from.

Regards,
"All of us would be better investors if we just made fewer decisions." - Daniel Kahneman
Topic Author
sokk55
Posts: 11
Joined: Mon Aug 30, 2021 10:26 am

Re: Avoiding pro rata rule when doing back door roth

Post by sokk55 »

retired@50 wrote: Tue Apr 02, 2024 10:15 am
sokk55 wrote: Tue Apr 02, 2024 10:08 am ... should I roll my current funds of my Rollover IRA into my current employer 401k,...
This ^^^ is what I'd do, unless your current 401k is loaded with high fees and high expense ratio funds to choose from.

Regards,
Can I do all of this within the same year?

1) transfer rollover IRA into current 401k plan (my plan is low fees and has low cost index funds)
2) close out the rollover ira
3) open traditional IRA and fund it with $7000
4) open Roth IRA, then apply for a back door transfer?
terran
Posts: 3134
Joined: Sat Jan 10, 2015 9:50 pm

Re: Avoiding pro rata rule when doing back door roth

Post by terran »

Yes, if you roll all previously deducted traditional IRA balances and gains into the 401(k) you'll avoid the issue. All that matters is that you do this by 12/31 of the year in which you make conversions, so you could contribute to a non-deductible IRA for 2023 now (the deadline is 4/15) and then start the rollover. If the rollover doesn't work out for whatever reason (like your 401(k) provider doesn't allow it) then you'd have to decide what to do about the contribution, but if you're pretty sure your 401(k) will allow the rollover then it's probably worth doing. If you decide to make the non-deductible contribution before the rollover is complete I'd open a new IRA so you don't have to worry about the wrong amount getting rolled over. That way you can just have the whole rollover IRA rolled into the 401(k).

If you want to play it safe you could complete the rollover before contributing, but chances are you'll only be able to contribute for 2024 not both 2023 and 2024 unless you can get it done the next two weeks, which is unlikely.
User avatar
retired@50
Posts: 12983
Joined: Tue Oct 01, 2019 2:36 pm
Location: Living in the U.S.A.

Re: Avoiding pro rata rule when doing back door roth

Post by retired@50 »

sokk55 wrote: Tue Apr 02, 2024 10:19 am
retired@50 wrote: Tue Apr 02, 2024 10:15 am
sokk55 wrote: Tue Apr 02, 2024 10:08 am ... should I roll my current funds of my Rollover IRA into my current employer 401k,...
This ^^^ is what I'd do, unless your current 401k is loaded with high fees and high expense ratio funds to choose from.

Regards,
Can I do all of this within the same year?

1) transfer rollover IRA into current 401k plan (my plan is low fees and has low cost index funds)
2) close out the rollover ira
3) open traditional IRA and fund it with $7000
4) open Roth IRA, then apply for a back door transfer?
That sounds right to me, but I'd strongly urge you to read about the backdoor Roth process in the wiki. So many people screw this up, and we spend so much time helping people untangle their problems, that it's worth doing some serious homework beforehand. Ideally, you want to have the confidence and knowledge to complete the process correctly. Relying on a paid tax preparer to handle it may lead to disappointment.

See link: https://www.bogleheads.org/wiki/Backdoor_Roth

Regards,
"All of us would be better investors if we just made fewer decisions." - Daniel Kahneman
toddthebod
Posts: 5987
Joined: Wed May 18, 2022 12:42 pm

Re: Avoiding pro rata rule when doing back door roth

Post by toddthebod »

sokk55 wrote: Tue Apr 02, 2024 10:19 am
retired@50 wrote: Tue Apr 02, 2024 10:15 am
sokk55 wrote: Tue Apr 02, 2024 10:08 am ... should I roll my current funds of my Rollover IRA into my current employer 401k,...
This ^^^ is what I'd do, unless your current 401k is loaded with high fees and high expense ratio funds to choose from.

Regards,
Can I do all of this within the same year?

1) transfer rollover IRA into current 401k plan (my plan is low fees and has low cost index funds)
2) close out the rollover ira
3) open traditional IRA and fund it with $7000
4) open Roth IRA, then apply for a back door transfer?
Yes, here was my experience with a rollover IRA at Schwab and a 401(k) at Fidelity.

Day one: liquidate investments in rollover IRA, and upload rollover form
Day two: got a call from Schwab in the morning to double check the instructions, account showed zero by the afternoon
Day nine: money appeared in my workplace plan
Day ten: opened traditional IRA, contributed from linked brokerage account, converted to Roth, placed mutual fund order which was executed COB.
Topic Author
sokk55
Posts: 11
Joined: Mon Aug 30, 2021 10:26 am

Re: Avoiding pro rata rule when doing back door roth

Post by sokk55 »

toddthebod wrote: Tue Apr 02, 2024 10:27 am
sokk55 wrote: Tue Apr 02, 2024 10:19 am
retired@50 wrote: Tue Apr 02, 2024 10:15 am
sokk55 wrote: Tue Apr 02, 2024 10:08 am ... should I roll my current funds of my Rollover IRA into my current employer 401k,...
This ^^^ is what I'd do, unless your current 401k is loaded with high fees and high expense ratio funds to choose from.

Regards,
Can I do all of this within the same year?

1) transfer rollover IRA into current 401k plan (my plan is low fees and has low cost index funds)
2) close out the rollover ira
3) open traditional IRA and fund it with $7000
4) open Roth IRA, then apply for a back door transfer?
Yes, here was my experience with a rollover IRA at Schwab and a 401(k) at Fidelity.

Day one: liquidate investments in rollover IRA, and upload rollover form
Day two: got a call from Schwab in the morning to double check the instructions, account showed zero by the afternoon
Day nine: money appeared in my workplace plan
Day ten: opened traditional IRA, contributed from linked brokerage account, converted to Roth, placed mutual fund order which was executed COB.
I have a feeling I can get this done in less than 10 days. Both my Rollover IRA and current 401k is all with Fidelity. I just checked and my plan does allow for transfer of old ira into the plan.
toddthebod
Posts: 5987
Joined: Wed May 18, 2022 12:42 pm

Re: Avoiding pro rata rule when doing back door roth

Post by toddthebod »

sokk55 wrote: Tue Apr 02, 2024 10:29 am
toddthebod wrote: Tue Apr 02, 2024 10:27 am
sokk55 wrote: Tue Apr 02, 2024 10:19 am
retired@50 wrote: Tue Apr 02, 2024 10:15 am
sokk55 wrote: Tue Apr 02, 2024 10:08 am ... should I roll my current funds of my Rollover IRA into my current employer 401k,...
This ^^^ is what I'd do, unless your current 401k is loaded with high fees and high expense ratio funds to choose from.

Regards,
Can I do all of this within the same year?

1) transfer rollover IRA into current 401k plan (my plan is low fees and has low cost index funds)
2) close out the rollover ira
3) open traditional IRA and fund it with $7000
4) open Roth IRA, then apply for a back door transfer?
Yes, here was my experience with a rollover IRA at Schwab and a 401(k) at Fidelity.

Day one: liquidate investments in rollover IRA, and upload rollover form
Day two: got a call from Schwab in the morning to double check the instructions, account showed zero by the afternoon
Day nine: money appeared in my workplace plan
Day ten: opened traditional IRA, contributed from linked brokerage account, converted to Roth, placed mutual fund order which was executed COB.
I have a feeling I can get this done in less than 10 days. Both my Rollover IRA and current 401k is all with Fidelity. I just checked and my plan does allow for transfer of old ira into the plan.
Yes, that will likely be faster as it shouldn't involve the mailing of a paper check between brokerages.
Topic Author
sokk55
Posts: 11
Joined: Mon Aug 30, 2021 10:26 am

Re: Avoiding pro rata rule when doing back door roth

Post by sokk55 »

Just a follow up question.

If I contribute my max limit for 2023 before 4/15/24 and also max out for 2024, can I convert all funds to Roth? Will there be tax implication or should I do this one step at a time?
toddthebod
Posts: 5987
Joined: Wed May 18, 2022 12:42 pm

Re: Avoiding pro rata rule when doing back door roth

Post by toddthebod »

sokk55 wrote: Tue Apr 02, 2024 10:52 am Just a follow up question.

If I contribute my max limit for 2023 before 4/15/24 and also max out for 2024, can I convert all funds to Roth? Will there be tax implication or should I do this one step at a time?
That's fine. You have to report your 2023 contribution on your 2023 form 8606, and the other contribution and conversion will be reported on your 2024 form 8606.
DrivingFun
Posts: 315
Joined: Wed Sep 19, 2007 6:12 pm

Re: Avoiding pro rata rule when doing back door roth

Post by DrivingFun »

When you rollover an IRA, does it actually close the IRA account (rollover/traditional) or just zeroes it out? In other words do you have to then open a new one for the purposes of doing backdoor conversations.
toddthebod
Posts: 5987
Joined: Wed May 18, 2022 12:42 pm

Re: Avoiding pro rata rule when doing back door roth

Post by toddthebod »

DrivingFun wrote: Tue Apr 02, 2024 1:01 pm When you rollover an IRA, does it actually close the IRA account (rollover/traditional) or just zeroes it out? In other words do you have to then open a new one for the purposes of doing backdoor conversations.
My form had a checkbox if I wanted to close the account. Considering it takes 30 seconds to open a new account at a brokerage who you already do business with, it shouldn't matter either way.
exodusNH
Posts: 10487
Joined: Wed Jan 06, 2021 7:21 pm

Re: Avoiding pro rata rule when doing back door roth

Post by exodusNH »

DrivingFun wrote: Tue Apr 02, 2024 1:01 pm When you rollover an IRA, does it actually close the IRA account (rollover/traditional) or just zeroes it out? In other words do you have to then open a new one for the purposes of doing backdoor conversations.
At the two brokers I used, the tIRA stayed open with a $0 balance. Some companies will close them if you don't use them after a period of time.

It's probably beneficial to leave it open, just in case the rules for opening accounts gets more strict. There's no real downside to keeping it open.
funxional
Posts: 303
Joined: Thu Oct 27, 2022 4:29 pm

Re: Avoiding pro rata rule when doing back door roth

Post by funxional »

Even if your rollover IRA stays open it's better to create a new one. Avoid any accidental chance of mixing funds.

You can complete it in a few days but what really matters is the IRA balance at the end of the year. There is no technical problem converting now and rolling in later but then you could be stuck if there are problems rolling it in.

You do not have to convert when you contribute. It makes less possible gain that would get taxed during rollover but a few days or weeks won't be significant. You could do your 2023 contribution now, work on getting the rollover Ira into the 401k, and once that is confirmed you can make your 2024 contribution and do the conversion.
placeholder
Posts: 8508
Joined: Tue Aug 06, 2013 12:43 pm

Re: Avoiding pro rata rule when doing back door roth

Post by placeholder »

terran wrote: Tue Apr 02, 2024 10:20 am Yes, if you roll all previously deducted traditional IRA balances and gains into the 401(k) you'll avoid the issue. All that matters is that you do this by 12/31 of the year in which you make conversions, so you could contribute to a non-deductible IRA for 2023 now (the deadline is 4/15) and then start the rollover.
What one could do is make the contribution into roth then if the rollover is accomplished recharacterize and if it's not going to happen request a return of excess contributions both of which have deadlines of six months past the contribution deadline.
terran
Posts: 3134
Joined: Sat Jan 10, 2015 9:50 pm

Re: Avoiding pro rata rule when doing back door roth

Post by terran »

placeholder wrote: Tue Apr 02, 2024 9:39 pm
terran wrote: Tue Apr 02, 2024 10:20 am Yes, if you roll all previously deducted traditional IRA balances and gains into the 401(k) you'll avoid the issue. All that matters is that you do this by 12/31 of the year in which you make conversions, so you could contribute to a non-deductible IRA for 2023 now (the deadline is 4/15) and then start the rollover.
What one could do is make the contribution into roth then if the rollover is accomplished recharacterize and if it's not going to happen request a return of excess contributions both of which have deadlines of six months past the contribution deadline.
Is the advantage of this that you can't request a return of excess contributions to a to a non-deductible traditional IRA?
placeholder
Posts: 8508
Joined: Tue Aug 06, 2013 12:43 pm

Re: Avoiding pro rata rule when doing back door roth

Post by placeholder »

terran wrote: Tue Apr 02, 2024 9:49 pm
placeholder wrote: Tue Apr 02, 2024 9:39 pm
terran wrote: Tue Apr 02, 2024 10:20 am Yes, if you roll all previously deducted traditional IRA balances and gains into the 401(k) you'll avoid the issue. All that matters is that you do this by 12/31 of the year in which you make conversions, so you could contribute to a non-deductible IRA for 2023 now (the deadline is 4/15) and then start the rollover.
What one could do is make the contribution into roth then if the rollover is accomplished recharacterize and if it's not going to happen request a return of excess contributions both of which have deadlines of six months past the contribution deadline.
Is the advantage of this that you can't request a return of excess contributions to a to a non-deductible traditional IRA?
They wouldn't be excess but I don't know the details of return of contributions.
magicrat
Posts: 1193
Joined: Sat Nov 29, 2014 6:04 pm

Re: Avoiding pro rata rule when doing back door roth

Post by magicrat »

sokk55 wrote: Tue Apr 02, 2024 10:19 am
retired@50 wrote: Tue Apr 02, 2024 10:15 am
sokk55 wrote: Tue Apr 02, 2024 10:08 am ... should I roll my current funds of my Rollover IRA into my current employer 401k,...
This ^^^ is what I'd do, unless your current 401k is loaded with high fees and high expense ratio funds to choose from.

Regards,
Can I do all of this within the same year?

1) transfer rollover IRA into current 401k plan (my plan is low fees and has low cost index funds)
2) close out the rollover ira
3) open traditional IRA and fund it with $7000
4) open Roth IRA, then apply for a back door transfer?
Getting your terminology right will help you avoid errors.

You will rollover your IRA to 401k (not transfer)

After you contribute to the IRA, you will convert it to a Roth (not transfer)

There is no application, and Backdoor Roth is a colloquial term only
Post Reply