... My quick and dirty calculations would have more more-or-less leanfire at 50, or FIRE at 55 or so, without taking into account Social Security or FERS pension. Pro-rata rule This rule applies when an individual owns other pre-tax retirement accounts, such as Rollover IRAs, Traditional IRAs, SEP IRAs, and SIMPLE IRAs. I appreciate the explanation that the inherited IRA isn’t yours, and therefore does not trigger the pro rata rule. Roth Conversions and the Pro-Rata Rule. This is very important to keep in mind when doing a rollover in the same year as a Roth conversion if after-tax money is involved. Fill in your details below or click an icon to log in: You are commenting using your WordPress.com account. Sounds simple right? For many investors, the change in value may not be signif­icant but it is important to be aware of during tax planning. You convert that $5,500 to a Roth IRA. The pro-rata calcu­lation is not based on the balances in the IRAs on the date of the conversion. Backdoor Roth IRA conversion - pro-rata caculation When you said 20% pre-tax and 20% post tax, you didn't say 20% of what. iow, that one day (12/31) is the only day that matters for purposes of the pro-rata rule. For example, Emmitt has a $100,000 IRA made with pre-tax dollars from many years ago when his income was lower. IRAs are considered individual IRAs even for taxpayers filing a joint return. However, you have to pay attention to the pro-rata rules. Change ), You are commenting using your Facebook account. Any growth (or loss) in the funds remaining in your IRA from now to the end of the year will have an impact on the pro-rata calcu­lation. The IRS’ pro-rata rule requires you to include all of your traditional IRA assets—that means your IRAs funded with pretax (deductible) contributions as well as those funded with after-tax (nondeductible) contributions—when figuring the conversion’s taxes. But not all 401(k) plans allow them. DO NOT PASS GO. Learn to Embrace It. This is a big potential “gotcha.” If you have IRA assets other than the non-deductible contribution that you made in step one, you have to consider all of the IRA assets when you calculate any taxes due. If you have an IRA with pre-tax dollars, the pro-rata rule makes it prohibitive to make backdoor Roth IRA contributions. An individual IRA is not combined with the spouse’s IRA balances for purposes of the pro-rata rule. Robert Brokamp: Backdoor Roths can be a great way for people who earn too much to contribute to the Roth IRA, to get money into a Roth IRA. Hello Accountant Community, I have a question that I am having problems with interpreting the rules. So, what if you have a pre-tax IRA account and want to make annual backdoor Roth conversions without owing extra tax? My wife inherited a small IRA and I wasn’t sure how that would impact her annual backdoor Roth. When you do a backdoor Roth conversion, you will be taxed on the “pro-rata” percentage of your total pre-tax IRA balances to the total of all of your IRA balances (Roth IRAs are not included for these purposes). The values of these accounts may determine how much of your backdoor roth conversion will be taxed. The answer, as I noted in that post, can sometimes be to do both. ... thanks to the IRS’ pro-rata rule. Once the money is in your employer’s plan, it’s stuck there until you separate from service. In order to avoid Pro Rata Rule complications, though, this option (to roll the funds rolled-in to an employer-sponsored retirement plan back out at any time) cannot be exercised until the calendar year after the left-behind-after-tax-IRA funds are converted to a Roth IRA. The rule says that you have to aggregate all your IRAs to determine how … Harry: thanks for this informative article. Discover how a backdoor Roth IRA works, how to set one up, the rules to follow, and when a backdoor IRA might not be right for you. I have spoken at length about 401K’s and even referenced some aspect of leveraging a Roth 401K versus a Standard 401K. As a result, the Pro Rata Rule requires you to include that as part of the calculation for taxes owed on the conversion. The total value of all IRAs used in the pro-rata rule include the account values as of December 31st of the year the conversion is made. Robert Brokamp: Backdoor Roths can be a great way for people who earn too much to contribute to the Roth IRA, to get money into a Roth IRA. I did so for the first time last year. For example, Emmitt has a $100,000 IRA made with pre-tax dollars from many years ago when his income was lower. Do nothing until you understand the steps and know what accounts you have and your projected income for the year. Click here for an example of the pro-rata rule calculation showing: a taxpayer with a pre-tax IRA of $10,000 who does a $6,000 backdoor Roth IRA and then; converts the remaining $10,000 the following year. However, the IRS released guidance that specifically addressed both backdoor Roth IRA conversions, and the so-called Mega Backdoor Roth IRA.As a result, it has gained even more popularity and interest. The Video: Backdoor Roth and Pro Rata Rule Explained The video is hosted on streamable, so there's no self promotion, branding, or monetization on my part. Rule says that you have a pre-tax IRA account to force you to include that as part of your IRAs. Real risk with this approach, the pro-rata rule, you send money... That one day ( 12/31 ) is the 8th wonder of the pro-rata rule is n't the only pro. Pro rata rule requires you to pay attention to the backdoor Roth may! 5,500 to a separate account that is triggered upon conversion as I noted in that post, can be... 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