Originally Posted by
herewego
Regional guy here lurking in the majors forum, so not rich but higher earner than the average American, with money in a traditional IRA that was both pretax and post tax contributions. Could you please explain the pro rata rule as I'm probably going to convert that Traditional to a Roth for the Backdoor.
kinda figure taxes for most of us will jump after Jan 2021 so I'd rather pay 24% now than 50% later.
This is a very simplistic example of the pro rata rule:
If your current Traditional IRA had $8, and the pre/post breakdown was $5-pre/$3-post and you wanted to do the back door contribution of $2, you would first contribute the $2 post tax into your IRA and then
convert $2 to your ROTH.
The tax issue (pro rata rule) is that the IRS doesn't care that you just put $2 of post tax into your IRA, they just see that the new ratio of pre/post in the traditional IRA is now $5/$5. You will need to pay taxes on 50% ($1) of that $2
conversion.
One thing that I've read is, with all the different brokerage houses out there, the best thing to set up is one Traditional IRA specifically for the back door process. Open the T-IRA and keep it at a $0 balance. When you want to do the B.D. conversion,
deposit the post tax $ into the T-IRA and then
convert it as soon as it clears the hold (usually 2-10 days depending on the brokerage). That way you don't owe tax on any of the deposited $ and the only thing you'll owe tax on is the earnings (if the market went up during the hold). Some brokerage houses know the deal, and will 'auto-convert' for you. You'd need to talk to the brokerage to see if they do this.
DYODD. I'm just a pilot and it isn't smart to take financial advice from a pilot.