Help w Pro-Rata Rule Application

[MWMack]

Dear WCI Community,

I'm posting here for the first time. I've been an attending for a little over a year and trying to figure out how to do the Backdoor Roth for 2022.

I have a Roth IRA from before medical school of about $20K. I also have $20k in a traditional IRA from the last 4 years (I got married in residency and my wife's income took us over the Roth Contribution Limits.) All that money contributed to the Traditional IRA was contributed by me after taxes directly to Vanguard from my bank account.

According the WCI instructions, I have to get rid of the Traditional IRA in order to do the Backdoor Roth:

1. Convert the entire sum to a Roth IRA. Only recommended if it is a relatively small amount and you can afford to pay the taxes out of current earnings or taxable investments with relatively high basis.
2. Roll the money over into a 401(k), 403(b), or Individual 401(k). 401(k)s don’t count in the aforementioned pro-rata calculation. Some physicians even open an Individual 401(k) at Fidelity, eTrade, or Vanguard (rollovers from traditional IRAs to solo 401(k)s is a recent addition to Vanguard) in order to facilitate a Backdoor Roth IRA.

My questions are as follows:
1) If I convert it to. Roth IRA, do I really have to pay taxes again on money I put in post-taxes? (sorry, this may be an incredibly naive question) if so, how do I figure out how much I owe?
2) I have a 401K through my work w Fidelity. Can I just roll my tIRA into a different company's 401K (sorry, again likely a very naive question)?
3) do people have a recommendation on what they would do in this situation?

Thank you so much.

[GasFIRE]

1. You should have filed Form 8606 for each year you made a contribution to create and keep track of your basis. If you didn’t you need to do so and enclose a letter of explanation for the IRS. You will only have to pay taxes to convert the earnings but you do have to document the basis via the 8606 filings.

2.Most 401k plans won’t let you rollover the basis.

[jfoxcpacfp]

You do not have to “get rid of” the TIRA in order to do a backdoor Roth maneuver. Having a pre-tax TIRA means you will pay pro-rata tax on your backdoor conversions. Pro-rata taxes are merely an early payment of the taxes you will one day have to pay on your TIRA distributions, along with their earnings in the future. Pro-rata taxes are not a tax penalty.

If you convert a nondeductible TIRA to a Roth, you are not paying taxes “again”. If you convert a pre-tax TIRA to a Roth, you are merely including in income that which you previously deducted (along with earnings converted). In neither case are you being double-taxed.

You can split your TIRA between pre-tax and post-tax. You can roll over the pretax portion (including all earnings) to a retirement plan that accepts such rollovers. You can roll over the post-tax portion to a Roth IRA. No tax involved (except later, when you take distributions from your pre-tax retirement account(s). This is what I would recommend if you don’t want to pay pro-rata today or convert 100% of your pre-tax balance in your TIRA to a Roth. Personally, I believe it may later be considered prescient to have converted now, especially in down markets.

[Bmac]

Of the current TIRA, how much are nondeductible contributions and how much is investment gain? Is it your only TIRA? If it’s mostly contributions and your only TIRA, I’d convert it all to the Roth and pay the taxes on the gains. You have enough income to do so and it will be much easier going forward. The hard part will be doing the missing Forms 8606 for the all the prior year nondeductible contributions to document the basis in the TIRA that you are converting.

[PantherMD]

If I could piggyback on the OP's question,

Question 1 - I found out I have a little over one dollar ($1.00) pretax dollars in a TradIRA account from a roll-over years ago and I want to do a backdoor Roth this year; since I will only increase my tax-liability by 1$ I should just move it all at once (while keeping the total transfer under 6k) right? And pay tax on the 1 dollar? Seems like thats what jfoxcpacfp mentioned?

(Question 2 - based on what GasFIRE said... Is there going to be a need for going backwards with an 8606? The TradIRA was only used once to roll an employer 401k into it, and then once into a roth in the past. )

[jfoxcpacfp]

1. Yes, that is correct
2. You will be subject to pro-rata tax only for years you did part 2 of the BD Roth (conversion of TIRA with basis to Roth) and had a balance in a TIRA with no basis on the last day of the year (12/31, to be specific).
   • So, if you had emptied the TIRA before 12/31 in the year in which you completed that step, you do not have pro-rata taxes
   • I presume this is what you meant by “going backwards”. However, you still are expected to complete form 8606 for any years in which you complete either step of a BD Roth.

[spiritrider]

Most 401k plans won’t let you rollover the basis.

The tax code and IRS regulations only allow the rollover of pre-tax IRA balances. Every 401k, 403b and 457b requires the participant to certify the rollover only contains pre-tax balances.

This requirement is what allows you to isolate and rollover pre-tax IRA balances, because any such rollover is deemed to first come from pre-tax balances.

Any rollover of non-deductible basis is a prohibited transaction and must be removed. The removed amount is not eligible for rollover. You effectively just permanently distributed the non-deductible basis.

[PantherMD]

1. Yes, that is correct
2. You will be subject to pro-rata tax only for years you did part 2 of the BD Roth (conversion of TIRA with basis to Roth) and had a balance in a TIRA with no basis on the last day of the year (12/31, to be specific).
   • So, if you had emptied the TIRA before 12/31 in the year in which you completed that step, you do not have pro-rata taxes
   • I presume this is what you meant by “going backwards”. However, you still are expected to complete form 8606 for any years in which you complete either step of a BD Roth.

So I wasn't sure if I completely understood you answer to Q2, decided to go back into my account to look at date specifics... and found out that it actually ISNT 1.10 pretax that was in there... I am glad this forced me to review.

Year1 I put in 5k rollover from 401k
By Year 3 it grew by $3.00
In Year 3 I did a Roth IRA conversion of the 5k Pretax Rolled over 401k money and paid tax on it, and emptied the account. I do not recall filling out any forms, but my CPA may have. On 12/31 of year three account balance was Zero.
in Year 4 it seems like I was advised to put in 1.10 cents to keep the account open in the latter portion of the year. Technically, that is post tax money/Non deductible contribution (I think?) No other transactions or conversions were done in this account, only that one time.

That value has remained in Cash and the same since then. so technically, if I was going to do a backdoor this year with 4k, I would just do $4001.10 and pay no tax and call it a day? No pro rata, and no tax payment.
The above were the only transactions in this T-IRA (Rollover IRA) account.

But also based on what you said... technically my 401k -->pretax tIRA -->Roth IRA movement that one time needs an 8606?

[jfoxcpacfp]

So I wasn't sure if I completely understood you answer to Q2, decided to go back into my account to look at date specifics... and found out that it actually ISNT 1.10 pretax that was in there... I am glad this forced me to review.

Year1 I put in 5k rollover from 401k
By Year 3 it grew by $3.00
In Year 3 I did a Roth IRA conversion of the 5k Pretax Rolled over 401k money and paid tax on it, and emptied the account. I do not recall filling out any forms, but my CPA may have. On 12/31 of year three account balance was Zero.
in Year 4 it seems like I was advised to put in 1.10 cents to keep the account open in the latter portion of the year. Technically, that is post tax money/Non deductible contribution (I think?) No other transactions or conversions were done in this account, only that one time.

That value has remained in Cash and the same since then. so technically, if I was going to do a backdoor this year with 4k, I would just do $4001.10 and pay no tax and call it a day? No pro rata, and no tax payment.
The above were the only transactions in this T-IRA (Rollover IRA) account.

But also based on what you said... technically my 401k -->pretax tIRA -->Roth IRA movement that one time needs an 8606?

1. Technically, that $1.10 reduced your allowable TIRA contribution that year by $1, but this is not anything I would try to go back and review or “fix”.
2. Are you saying you will contribute $4k (rather than the allowable $6k) and empty the account? If you are above the income threshold for a deductible TIRA contribution then, yes, this would be correct.
3. Yes, you need to file an 8606 to establish basis.