Backdoor Roth IRA for previous year where pro rata was in effect

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Topic Author
viet
Posts: 7
Joined: Wed Jan 09, 2019 6:23 pm

Backdoor Roth IRA for previous year where pro rata was in effect

Post by viet »

I just want to preface that I do know the backdoor Roth IRA could be eliminated in the next year. But until it does happen let’s not entertain it when considering my question.

For the calendar year 2022 I’ll have access to a 401(k) which allows reverse rollovers and transfers of employer sponsored retirement accounts.

I currently have a SIMPLE IRA and a rolled over 401(k) to IRA. The existence of the accounts have prevented me from doing backdoors due to tax from the pro rata rule. I plan to immediately transfer the assets from these tax-deferred accounts to the 401(k) when the 401(k) becomes active to drop the pro rata roadblock.

This will give me the opportunity to initiate backdoor Roth IRA conversions for funds earmarked as 2022 contributions.

My question: am I able to backdoor funds earmarked for 2021, contributed in 2022, if this was done after the SIMPLE IRA and rollover IRA transfers to the 401(k) are complete, thus avoiding pro rata? I know it would have to be done before the April 15 2022 deadline.
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Eagle33
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Re: Backdoor Roth IRA for previous year where pro rata was in effect

Post by Eagle33 »

It's the year that you complete the second step of the back door - what year you actually do the conversion step is what matters.
Topic Author
viet
Posts: 7
Joined: Wed Jan 09, 2019 6:23 pm

Re: Backdoor Roth IRA for previous year where pro rata was in effect

Post by viet »

Eagle33 wrote: Sat Oct 16, 2021 8:35 pm It's the year that you complete the second step of the back door - what year you actually do the conversion step is what matters.
Just for my clarification, are you saying that if I contribute 2021 earmarked funds in 2022 and do the conversion it’ll be re-earmarked as 2022 funds?
MrJedi
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Joined: Wed May 06, 2020 11:42 am

Re: Backdoor Roth IRA for previous year where pro rata was in effect

Post by MrJedi »

Conversion is a separate and independent step from contribution. There is no limit for any income level for Roth conversion. You can convert dollars from 10 years ago, it makes no difference. The conversion will show in the calendar year the conversion was made.
Topic Author
viet
Posts: 7
Joined: Wed Jan 09, 2019 6:23 pm

Re: Backdoor Roth IRA for previous year where pro rata was in effect

Post by viet »

MrJedi wrote: Sat Oct 16, 2021 9:01 pm Conversion is a separate and independent step from contribution. There is no limit for any income level for Roth conversion. You can convert dollars from 10 years ago, it makes no difference. The conversion will show in the calendar year the conversion was made.
Gotcha. So in other words, once the tax deferred accounts are eliminated (the ones which realize taxes from conversion due to the pro rata rule), conversions of any contribution can be made without experiencing taxes triggered by pro rata?
MrJedi
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Re: Backdoor Roth IRA for previous year where pro rata was in effect

Post by MrJedi »

viet wrote: Sat Oct 16, 2021 9:15 pm
MrJedi wrote: Sat Oct 16, 2021 9:01 pm Conversion is a separate and independent step from contribution. There is no limit for any income level for Roth conversion. You can convert dollars from 10 years ago, it makes no difference. The conversion will show in the calendar year the conversion was made.
Gotcha. So in other words, once the tax deferred accounts are eliminated (the ones which realize taxes from conversion due to the pro rata rule), conversions of any contribution can be made without experiencing taxes triggered by pro rata?
Yes that is correct, since your proration becomes 100% nontaxable basis and 0% tax deferred by virtue of having $0 tax deferred remaining.
marcopolo
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Re: Backdoor Roth IRA for previous year where pro rata was in effect

Post by marcopolo »

viet wrote: Sat Oct 16, 2021 9:15 pm
MrJedi wrote: Sat Oct 16, 2021 9:01 pm Conversion is a separate and independent step from contribution. There is no limit for any income level for Roth conversion. You can convert dollars from 10 years ago, it makes no difference. The conversion will show in the calendar year the conversion was made.
Gotcha. So in other words, once the tax deferred accounts are eliminated (the ones which realize taxes from conversion due to the pro rata rule), conversions of any contribution can be made without experiencing taxes triggered by pro rata?
You don't even have to wait until the tax-deferred IRA is emptied to do the conversion. As long as they are empty by Dec 31 of the year you do the conversion, then no pro-rata tax applies.
Once in a while you get shown the light, in the strangest of places if you look at it right.
Topic Author
viet
Posts: 7
Joined: Wed Jan 09, 2019 6:23 pm

Re: Backdoor Roth IRA for previous year where pro rata was in effect

Post by viet »

Thanks for the help in understanding all of this. I greatly appreciate it.
marcopolo wrote: Sat Oct 16, 2021 9:36 pm
viet wrote: Sat Oct 16, 2021 9:15 pm
MrJedi wrote: Sat Oct 16, 2021 9:01 pm Conversion is a separate and independent step from contribution. There is no limit for any income level for Roth conversion. You can convert dollars from 10 years ago, it makes no difference. The conversion will show in the calendar year the conversion was made.
Gotcha. So in other words, once the tax deferred accounts are eliminated (the ones which realize taxes from conversion due to the pro rata rule), conversions of any contribution can be made without experiencing taxes triggered by pro rata?
You don't even have to wait until the tax-deferred IRA is emptied to do the conversion. As long as they are empty by Dec 31 of the year you do the conversion, then no pro-rata tax applies.
Thanks for pointing it out. I also just saw this fact literally a minute ago on Form 8606.
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