Did I dodge pro-rata with my backdoor Roth?

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DiceGames
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Did I dodge pro-rata with my backdoor Roth?

Post by DiceGames »

Hi Boglehead tax experts,

In May 2020 I made $6k 2019 and $6k 2020 IRA contributions with immediate Roth conversions.

Problem was, I had an existing $30k traditional IRA (technically a previous 401k I rolled out).

I caught on to the pro rata issue December 26, 2020 (!!) and quickly had my brokerage cut a direct roll over check dated December 2020 to roll into my existing employer’s 401k. My 2020 1099-R reflects this distribution.

Side note, I lost the check (ugh) and had to ask them to recut a check dated 2021. But again, IRA was cashed out and closed with distribution already “in-process” in 2020, so hoping the actual check date doesn’t matter.

Questions on 2 issues:
1. does the check date matter?
2. I believe I’m clear of pro rata for the 2020 tax year conversion due to roll into 401k. Is the pro rata rule an issue for the 2019 tax year conversion, or am I ok as it was also made in calendar year 2020?

Thanks (edited for clarity)
Last edited by DiceGames on Wed Jul 28, 2021 8:55 pm, edited 1 time in total.
Silk McCue
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Re: Did I dodge pro-rata with my backdoor Roth?

Post by Silk McCue »

I’ll go out on a limb and say that the 2020 1099-R rules the day with the IRS. Had you done this on the last trading day of the year the date on the check would have been 2021 as well.

Cheers
Kookaburra
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Re: Did I dodge pro-rata with my backdoor Roth?

Post by Kookaburra »

When you get to Form 8606 Line 6, the part “... plus any outstanding rollovers” suggests that the pro-rata will apply to your conversion.
Topic Author
DiceGames
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Re: Did I dodge pro-rata with my backdoor Roth?

Post by DiceGames »

deleted - duplicate comment
Last edited by DiceGames on Wed Jul 28, 2021 8:50 pm, edited 2 times in total.
Topic Author
DiceGames
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Re: Did I dodge pro-rata with my backdoor Roth?

Post by DiceGames »

Kookaburra wrote: Wed Jul 28, 2021 8:45 pm When you get to Form 8606 Line 6, the part “... plus any outstanding rollovers” suggests that the pro-rata will apply to your conversion.

yes but that line also says “Note. Don’t include an outstanding rollover from a traditional, SEP, or SIMPLE IRA to a qualified retirement plan.”

https://www.irs.gov/instructions/i8606
Topic Author
DiceGames
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Re: Did I dodge pro-rata with my backdoor Roth?

Post by DiceGames »

Silk McCue wrote: Wed Jul 28, 2021 8:43 pm I’ll go out on a limb and say that the 2020 1099-R rules the day with the IRS. Had you done this on the last trading day of the year the date on the check would have been 2021 as well.

Cheers
thanks, and the fact that one of the conversions was for 2019 tax year isn’t a 2019 pro-rata issue because it was done in 2020 calendar year?
Silk McCue
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Re: Did I dodge pro-rata with my backdoor Roth?

Post by Silk McCue »

DiceGames wrote: Wed Jul 28, 2021 8:49 pm
thanks, and the fact that one of the conversions was for 2019 tax year isn’t a 2019 pro-rata issue because it was done in 2020 calendar year?
That is correct. It is 12/31 of the year in which the Backdoor Roth was performed that matters and that was 2020.

Cheers
Topic Author
DiceGames
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Re: Did I dodge pro-rata with my backdoor Roth?

Post by DiceGames »

Silk McCue wrote: Wed Jul 28, 2021 8:54 pm
DiceGames wrote: Wed Jul 28, 2021 8:49 pm
thanks, and the fact that one of the conversions was for 2019 tax year isn’t a 2019 pro-rata issue because it was done in 2020 calendar year?
That is correct. It is 12/31 of the year in which the Backdoor Roth was performed that matters and that was 2020.

Cheers
Thanks! Stressed about this for 7 months needlessly :mrgreen: Welcome any other opinions.
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Re: Did I dodge pro-rata with my backdoor Roth?

Post by placeholder »

I gather that the outstanding rollover thing is to prevent you from doing a rollover from one ira to another straddling the end of the year.
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DiceGames
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Re: Did I dodge pro-rata with my backdoor Roth?

Post by DiceGames »

placeholder wrote: Thu Jul 29, 2021 12:02 am I gather that the outstanding rollover thing is to prevent you from doing a rollover from one ira to another straddling the end of the year.
To effectively prevent balance deflation? Although I’m not sure why one would do that. Regardless, rolling into a 401k seems ok, despite end of year timing?
Silk McCue
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Re: Did I dodge pro-rata with my backdoor Roth?

Post by Silk McCue »

DiceGames wrote: Thu Jul 29, 2021 8:05 am
placeholder wrote: Thu Jul 29, 2021 12:02 am I gather that the outstanding rollover thing is to prevent you from doing a rollover from one ira to another straddling the end of the year.
To effectively prevent balance deflation? Although I’m not sure why one would do that. Regardless, rolling into a 401k seems ok, despite end of year timing?
Rollover to 401k is fine (that has been settled) despite it occuring at the end of the year as it will not land back in an IRA. The IRS isn't going to allow folks to temporarily "empty", via an end of year rollover, their IRA to another IRA in the next year to avoid the pro-rata rule.

Cheers
Alan S.
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Re: Did I dodge pro-rata with my backdoor Roth?

Post by Alan S. »

The vital document is Form 5498.

For the rollover IRA, if the custodian reports a 0 balance on 12/31/2020, there will be no 5498, which is good. But if you received a 5498 showing a year end balance for the rollover IRA (or any other non Roth IRA), then your conversion will be taxable due to having to include that balance on line 6 of Form 8606.
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Re: Did I dodge pro-rata with my backdoor Roth?

Post by placeholder »

DiceGames wrote: Thu Jul 29, 2021 8:05 am
placeholder wrote: Thu Jul 29, 2021 12:02 am I gather that the outstanding rollover thing is to prevent you from doing a rollover from one ira to another straddling the end of the year.
To effectively prevent balance deflation? Although I’m not sure why one would do that. Regardless, rolling into a 401k seems ok, despite end of year timing?
I'm not sure what balance deflation is but what I was getting at was doing rollovers that just keep the money out of the ira on 12/31 and then put it right back in and yes the 401k is fine.
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celia
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Re: Did I dodge pro-rata with my backdoor Roth?

Post by celia »

As long as the replacement check was deposited into the 401K within 60 days of the first check being issued, you should be ok.
IRS, Pub 590-B wrote:For purposes of line 6, a rollover is a tax-free distribution from one traditional, SEP, or SIMPLE IRA that is contributed to another traditional, SEP, or SIMPLE IRA. The rollover must be completed within 60 days after receiving the distribution from the first IRA. An outstanding rollover is generally the amount of any distribution received in 2020 after November 1, 2020, that was rolled over in 2021, but within the 60-day rollover period. A rollover between a SIMPLE IRA and a qualified retirement plan or an IRA (other than a SIMPLE IRA) can only take place after your first 2 years of participation in the SIMPLE IRA. See Pub. 590-A for more details.
The first quoted sentence sounds like it applies to both incoming and outgoing rollovers to the tIRA, neither of which applies to the OP.

The italicized sentence doesn't make sense to me unless time travel is taken into account.
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DiceGames
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Re: Did I dodge pro-rata with my backdoor Roth?

Post by DiceGames »

celia wrote: Thu Jul 29, 2021 7:26 pm As long as the replacement check was deposited into the 401K within 60 days of the first check being issued, you should be ok.
IRS, Pub 590-B wrote:For purposes of line 6, a rollover is a tax-free distribution from one traditional, SEP, or SIMPLE IRA that is contributed to another traditional, SEP, or SIMPLE IRA. The rollover must be completed within 60 days after receiving the distribution from the first IRA. An outstanding rollover is generally the amount of any distribution received in 2020 after November 1, 2020, that was rolled over in 2021, but within the 60-day rollover period. A rollover between a SIMPLE IRA and a qualified retirement plan or an IRA (other than a SIMPLE IRA) can only take place after your first 2 years of participation in the SIMPLE IRA. See Pub. 590-A for more details.
The first quoted sentence sounds like it applies to both incoming and outgoing rollovers to the tIRA, neither of which applies to the OP.

The italicized sentence doesn't make sense to me unless time travel is taken into account.

Hmm well it wasn’t complete within 60 days as I lost the check, but it wasn’t an IRA to IRA roll over but instead an IRA to 401k rollover. In this case I think (hope?) the 60 day limit doesn’t apply, as I wasn’t trying to game the system with an unqualified rollover to temporarily lower my IRA balance.

edit: Also, my 2020 year end IRA statement shows $0 balance and my 2020 1099-R tax form reflects the distribution. Plus, no 5498 form for the closed out IRA.
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celia
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Re: Did I dodge pro-rata with my backdoor Roth?

Post by celia »

Alan S. wrote:
DiceGames wrote: Fri Jul 30, 2021 8:22 am
celia wrote: Thu Jul 29, 2021 7:26 pm As long as the replacement check was deposited into the 401K within 60 days of the first check being issued, you should be ok.
Hmm well it wasn’t complete within 60 days as I lost the check, but it wasn’t an IRA to IRA roll over but instead an IRA to 401k rollover. In this case I think (hope?) the 60 day limit doesn’t apply, as I wasn’t trying to game the system with an unqualified rollover to temporarily lower my IRA balance.

edit: Also, my 2020 year end IRA statement shows $0 balance and my 2020 1099-R tax form reflects the distribution. Plus, no 5498 form for the closed out IRA.
Alan S., Since the rollover wasn’t completed in 60 days, this looks problematic to me. Sixty days should be more than enough time for you to realize you lost the check and have it replaced, which you didn’t do in a timely manner.

Now, if it was the post office or one of the custodians who lost the check, THAT would not be subject to a time limit, since it would be out of your control.

DiceGames, Was the check made out to you or to the 401K custodian For Benefit Of (FBO) <DiceGames>?
A dollar in Roth is worth more than a dollar in a taxable account. A dollar in taxable is worth more than a dollar in a tax-deferred account.
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DiceGames
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Re: Did I dodge pro-rata with my backdoor Roth?

Post by DiceGames »

celia wrote: Sun Aug 01, 2021 5:13 pm
Alan S. wrote:
DiceGames wrote: Fri Jul 30, 2021 8:22 am
celia wrote: Thu Jul 29, 2021 7:26 pm As long as the replacement check was deposited into the 401K within 60 days of the first check being issued, you should be ok.
Hmm well it wasn’t complete within 60 days as I lost the check, but it wasn’t an IRA to IRA roll over but instead an IRA to 401k rollover. In this case I think (hope?) the 60 day limit doesn’t apply, as I wasn’t trying to game the system with an unqualified rollover to temporarily lower my IRA balance.

edit: Also, my 2020 year end IRA statement shows $0 balance and my 2020 1099-R tax form reflects the distribution. Plus, no 5498 form for the closed out IRA.
Alan S., Since the rollover wasn’t completed in 60 days, this looks problematic to me. Sixty days should be more than enough time for you to realize you lost the check and have it replaced, which you didn’t do in a timely manner.

Now, if it was the post office or one of the custodians who lost the check, THAT would not be subject to a time limit, since it would be out of your control.

DiceGames, Was the check made out to you or to the 401K custodian For Benefit Of (FBO) <DiceGames>?

Well, actually my 401k provider rejected the initial roll-in attempt because they didn’t understand the forms I sent, although they were actually correct (annoying, I know).

The check was made out to the 401k custodian FBO DiceGames. Hopefully that helps?
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celia
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Re: Did I dodge pro-rata with my backdoor Roth?

Post by celia »

DiceGames wrote: Sun Aug 01, 2021 10:31 pm Well, actually my 401k provider rejected the initial roll-in attempt because they didn’t understand the forms I sent, although they were actually correct (annoying, I know).

The check was made out to the 401k custodian FBO DiceGames. Hopefully that helps?
I’m lost. What happened to the check after it was rejected?
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DiceGames
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Re: Did I dodge pro-rata with my backdoor Roth?

Post by DiceGames »

celia wrote: Sun Aug 01, 2021 10:38 pm
DiceGames wrote: Sun Aug 01, 2021 10:31 pm Well, actually my 401k provider rejected the initial roll-in attempt because they didn’t understand the forms I sent, although they were actually correct (annoying, I know).

The check was made out to the 401k custodian FBO DiceGames. Hopefully that helps?
I’m lost. What happened to the check after it was rejected?
Sorry - they sent it back to me at / near the 60 day mark. I then lost the check, but wouldn’t have been able to get it back to them for a completed roll-in by 60 days.

My question is does the 60 day term apply to all to all roll overs, including those to qualified retirement plans as this seems to be a special case per form 8606, line 6 “Note. Don’t include an outstanding rollover from a traditional, SEP, or SIMPLE IRA to a qualified retirement plan.”
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celia
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Re: Did I dodge pro-rata with my backdoor Roth?

Post by celia »

DiceGames wrote: Mon Aug 02, 2021 8:21 am My question is does the 60 day term apply to all to all roll overs, including those to qualified retirement plans as this seems to be a special case per form 8606, line 6 “Note. Don’t include an outstanding rollover from a traditional, SEP, or SIMPLE IRA to a qualified retirement plan.”
We’re looking at two different things. You are looking to see if the pro rata rule applies and I am looking to see if the rollover was ‘valid’ which will impact the pro rata rule. Right now, it looks to me like the rollover was direct but failed the 60-day deadline that applies to indirect rollovers (check made out to you).

I’m hoping Alan pops in on the rollover issue. I’ll PM him.

Meanwhile, I was trying to get the needed info from you about the rollover. Each time you give further info that leads to more questions. Now I’d like to know if the 401K custodian eventually accepted the original form you sent in or was it in error and you had to re-do it? Right now, it looks like both you and the custodian contributed to the delay.
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Re: Did I dodge pro-rata with my backdoor Roth?

Post by retiredjg »

DiceGames wrote: Sun Aug 01, 2021 10:31 pm The check was made out to the 401k custodian FBO DiceGames. Hopefully that helps?
This makes it a direct rollover. I'm not sure a direct rollover is subject to the 60 day requirement. Alan?
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Re: Did I dodge pro-rata with my backdoor Roth?

Post by Alan S. »

retiredjg wrote: Mon Aug 02, 2021 12:46 pm
DiceGames wrote: Sun Aug 01, 2021 10:31 pm The check was made out to the 401k custodian FBO DiceGames. Hopefully that helps?
This makes it a direct rollover. I'm not sure a direct rollover is subject to the 60 day requirement. Alan?
A direct rollover is not subject to a 60 day deposit time limit. Because the check is payable to the plan FBO participant and not the IRA owner, the IRA owner has no opportunity to use the funds for some form of loan. The following link does a decent job of explaining this:

https://www.greenbushfinancial.com/all- ... it-be-used

Since a new replacement direct rollover check was issued and presumably is now deposited into the 401k plan, the time spent on all these activities is meaningless (outside of not being invested for a time). There should not be an issue unless the IRA custodian chooses to issue a 5498 showing a year end IRA balance, corrects the 1099R, etc. That would create an 8606 issue for line 6. If this happened, it may be difficult to contest it being a 2021 direct rollover, since the operating procedures of the IRA custodian would be brought into play.
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Re: Did I dodge pro-rata with my backdoor Roth?

Post by celia »

DiceGames wrote: Mon Aug 02, 2021 8:21 am My question is does the 60 day term apply to all to all roll overs, including those to qualified retirement plans as this seems to be a special case per form 8606, line 6 “Note. Don’t include an outstanding rollover from a traditional, SEP, or SIMPLE IRA to a qualified retirement plan.”
Looks like your rollover is fine as the 60-day rollover rule won’t apply and it doesn’t impact the Backdoor Roth!
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Re: Did I dodge pro-rata with my backdoor Roth?

Post by DiceGames »

Alan S. wrote: Mon Aug 02, 2021 1:42 pm
retiredjg wrote: Mon Aug 02, 2021 12:46 pm
DiceGames wrote: Sun Aug 01, 2021 10:31 pm The check was made out to the 401k custodian FBO DiceGames. Hopefully that helps?
This makes it a direct rollover. I'm not sure a direct rollover is subject to the 60 day requirement. Alan?
A direct rollover is not subject to a 60 day deposit time limit. Because the check is payable to the plan FBO participant and not the IRA owner, the IRA owner has no opportunity to use the funds for some form of loan. The following link does a decent job of explaining this:

https://www.greenbushfinancial.com/all- ... it-be-used

Since a new replacement direct rollover check was issued and presumably is now deposited into the 401k plan, the time spent on all these activities is meaningless (outside of not being invested for a time). There should not be an issue unless the IRA custodian chooses to issue a 5498 showing a year end IRA balance, corrects the 1099R, etc. That would create an 8606 issue for line 6. If this happened, it may be difficult to contest it being a 2021 direct rollover, since the operating procedures of the IRA custodian would be brought into play.
This forum is awesome, thank you all. Clear that the 60 day rule doesn’t apply here.

I called my IRA custodian today and the rep believes they will issue a 1099-R for 2021 which is “coded as a 2020 direct roll over,” whatever that means. I’m wondering if this creates an issue for my 2020 taxes, which I haven’t yet filed but intend to use the 2020 forms which support my pro-data avoidance (for now at least).

I’m happy to go see a tax consultant, but guessing I may need to deal directly with the IRS. Assuming I DO have a 20211099-R to deal with, would I include a letter of explanation with my 2021 filing?
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Re: Did I dodge pro-rata with my backdoor Roth?

Post by Alan S. »

To reclassify the direct rollover as a 2021 direct rollover, the 2020 form would have to be corrected to 0, erasing the distribution, and a 5498 would have to be issued showing a year end balance. Then a 2021 1099R would be issued next January. I don't expect this to happen, but you might watch for the first clue, which would be the corrected 2020 1099R and the 2020 5498 showing an IRA year end balance.

Of course, that would cause your 2020 conversion to be mostly taxable. No reason not to file your 2020 return based on the forms you already have at this point. If you want to know now, call the IRA custodian and verify that the forms will stay as is.
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DiceGames
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Re: Did I dodge pro-rata with my backdoor Roth?

Post by DiceGames »

Alan S. wrote: Mon Aug 02, 2021 6:17 pm To reclassify the direct rollover as a 2021 direct rollover, the 2020 form would have to be corrected to 0, erasing the distribution, and a 5498 would have to be issued showing a year end balance. Then a 2021 1099R would be issued next January. I don't expect this to happen, but you might watch for the first clue, which would be the corrected 2020 1099R and the 2020 5498 showing an IRA year end balance.

Of course, that would cause your 2020 conversion to be mostly taxable. No reason not to file your 2020 return based on the forms you already have at this point. If you want to know now, call the IRA custodian and verify that the forms will stay as is.
Thanks Alan, Celia and others - very helpful. I’ll consider this closed and reopen only if I run into 2021 filing issues next year.
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