Does Pro Rata Rule Apply to Mega Backdoor Roth?

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totalnoobie
Posts: 94
Joined: Thu Dec 31, 2015 10:33 pm

Does Pro Rata Rule Apply to Mega Backdoor Roth?

Post by totalnoobie »

I understand the pro rata rule for normal backdoor roth, but if I do a mega backdoor roth, does the pro rata rule apply if I have pre-tax as well as after-tax contributions in my 401k?

I had previously thought it did not apply, but then I saw this on the IRS website:

https://www.irs.gov/retirement-plans/ro ... ment-plans

Any clarification would be greatly appreciated!
CppCoder
Posts: 920
Joined: Sat Jan 23, 2016 9:16 pm

Re: Does Pro Rata Rule Apply to Mega Backdoor Roth?

Post by CppCoder »

totalnoobie wrote:I understand the pro rata rule for normal backdoor roth, but if I do a mega backdoor roth, does the pro rata rule apply if I have pre-tax as well as after-tax contributions in my 401k?

I had previously thought it did not apply, but then I saw this on the IRS website:

https://www.irs.gov/retirement-plans/ro ... ment-plans

Any clarification would be greatly appreciated!
Pro rata only applies to the balance in the after-tax subaccount, not to the pretax subaccount. So, you have to pay tax only on the gains in the after-tax. That said, you can even avoid that by splitting the rollover between a tIRA and Roth IRA.
Alan S.
Posts: 10681
Joined: Mon May 16, 2011 6:07 pm
Location: Prescott, AZ

Re: Does Pro Rata Rule Apply to Mega Backdoor Roth?

Post by Alan S. »

The linked IRS page is poorly written and misleading. It completely ignores that after tax contributions are almost always made to a separate sub account which can make separate distributions from the rest of the plan which are not pro rated with the rest of the plan. This remains true even after separation when the rest of the plan is also eligible for distribution. Therefore, the mega back door Roth can be performed by specific request even after separation.

As stated, even if a certain plan argues that the sub account disappears after separation, Notice 2014-54 allows the participant to split the after tax from the pre tax amounts of the rollover with respect to the destination accounts.
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