[USER]

Hello! Need some help understanding what to do with a rollover IRA.

I learned that in order to use the mega backdoor Roth conversion, I cannot have funds in a traditional IRA.

I then rolled my IRA funds into my then employer’s 401k but now I have $70 in dividends that hit the IRA account. What should I do about that?

I am no longer employed in the US so no 401k to roll it into. Should I take it out as cash? Any problems with doing that?

I have around $200k of post tax money into a 401k which I want to convert to Roth. I hope I’m making sense.

Thanks for your help!

[Christopher]

Mega backdoor doesn’t care about traditional ira balances, ordinary backdoor conversions do.

Anyway, you can leave the $70 in there and eat the tax hit the next time you do a Roth conversion.

$70/$7,070 will mean it’s still ~99% tax free; the tax liability will be on the order of tens of dollars at worst.

[Joel]

Mega-backdoor Roth is a contribution strategy, not conversion.
$70 is deminimus – just convert it to a Roth IRA if it bothers you.

If the $70 is from a previous attempt at a backdoor Roth IRA contribution, probably $69 of that is still cost basis. You should check your Form 8606 from that year.

Converting the basis might be a good idea, but this is where the Pro-rata Rule applies.

The Pro-rata Rule does not apply the way you seem to think. A rollover from an employer sponsored retirement plan is not affected by your Traditional IRA balances, so that $70 could just stay put, assuming it has no cost basis left in it.

There are two types of “post-tax” contributions you could make into an employer sponsored retirement plan – Roth and After-tax. I assume you mean After-tax if you are wanting to convert to Roth.

Just ask your former 401k plan administrator to rollover the entire 401k balance.

Ask them to split out any After-tax contributions (basis) into a Roth IRA and everything else into a Traditional Rollover IRA.

Again, this has nothing to do with the Pro-rata Rule so you can leave that $70 alone, but converting the $70 to Roth may invoke the Pro-rata Rule if it contains a cost basis.

[Rick]

It’s a one time tax hit, both dollar and tax reporting effort, versus some bizarre % whittling it down over many years impact.

Just rip the bandaid off one time effort and done for a pretty low cost.

[Joel]

Stepping back — you are conflating a number of issues and over thinking things.

You can simply Rollover your 401k since you are no longer employed.

401k funds will rollover as described:
– Pretax to a Traditional IRA
– Roth to a Roth IRA
– After Tax to a Roth IRA.

[Kevin]

I like the idea of taking the cash this tax year and closing the account. Then in January (or later), your Roth conversion is “clean and simple “

The early withdrawal penalty is trivial and worth it to simplify the process imo.

Note: personal opinion, not tax or investing advice.

[Author]

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