[Tabitha]

I think somewhere along the way I mixed up the details of a Backdoor Roth IRA and a Roth Conversion.

If I would like to rollover old 401Ks (mostly traditional, one partial-Roth 401K) into a Fidelity IRA, will I be creating any issues with doing future Roth conversions?

I remember hearing something about a rule where you would be taxed on the full value of the IRA even if you want to do a partial conversion…but is that just relevant to the Backdoor Roth?

[Amy]

When you do a partial Roth IRA conversion, you pay tax on the converted amount in proportion to the pre-tax dollars that are in all non-Roth IRAs (so traditional, SEP, Simple and rollover combined).

This is called the pro rata rule. With a *backdoor* Roth IRA conversion, all non-Roth IRAs are empty, so there are no pre-tax dollars involved and no tax owed.

Example: You have a rollover IRA with $100K, $60K of which is pre-tax and $40K of which is post-tax. You convert $10K to Roth.

60% of the converted amount is taxable at ordinary income tax rates. 60% * $10K = $6K is taxable.

If you’re in the 22% tax bracket, you would owe $1,320 tax on the $10K converted amount.

After the conversion, you have $90K remaining in the rollover IRA, $54K of which is pre-tax and $36K of which is post-tax.

[Trevis]

I think that you’re thinking about the pro rata rule which complicates doing a backdoor Roth if you have money in a traditional Ira.

If your income is high and you think that you’ll want to do use the backdoor method to add new money to Roth you should consider leaving leaving the 401k as is or maybe rolling it into your current 401k. (Which is what I did)

[Ron]

You are not intending to do a backdoor roth in the future, correct? You do intend to convert what will be in your traditional IRA to roth over a period of many years in the future, correct?

When you rollover your 401Ks, you’ll rollover roth 401K money to a roth IRA and you’ll rollover the other (traditional) 401K money to a traditional IRA.

In the latter part, you are exactly the same as me. I never had any roth 401K money. I rolled over a bunch of old 401Ks to a traditional IRA.

So, over the years I have converted various amounts from traditional IRA to roth IRA. The exact amount I convert each year is added to taxable income that year.

I get a a 1099R showing the precise amount of the conversion down to the penny. I’ve converted as little as $5k up to $23K in a tax year.

The conversion only adds to my taxable income the exact amount I convert.

The full balance of my traditional IRAs is irrelevant in terms of taxes and my tax software never asks me what the full balance is, because it’s not relevant in my situation.

My tax software fills out the pro rata rule form, #5606 I think, and adds it to my submission, but it’s meaningless to my taxes since I never had a nondeductible contribution to a traditional IRA.

The question about “what’s the balance in your traditional IRAs on December 31 of the tax year” is on form 5606, but my software never asks me and form 5606 is included in my tax package with that number blank.

The pro rata rule is a way to lower the tax on the conversion. You’ve said you only want to make sure that you’ll only be taxed on the amount you convert each year and that is always the case.

You could try to understand the pro rata rule, but it’s not necessary based on your indication that you are not planning to do backdoor Roths.

If you ever had contributed to an IRA without deducting it, the pro rata rule would be meaningful and you would be taxed on only a percentage of the amount you convert each year.

So, though the rule/form looks at your whole traditional balance, it’s only purpose is to lower the proportion of the conversion amount that is taxed.

Hope this helps and hope I interpreted your question and comments correctly.

Good luck.

[Sean]

If you are converting all pretax dollars to Roth, you are already taxed on the full amount, so there is nothing to pro rate.

[Bill]

Yes, you will be taxed on any backdoor roths or conversions if you have traditional Ira balances.

A “backdoor Roth” is just an Ira contribution followed by a Roth conversion.

Any sort of Roth conversion will trigger that pro rata rule.

[Author]

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