I was looking to setup a backdoor Roth, but had some questions about the pro rata rule and if there's any way around it.

• For years I have had a Traditional IRA (pre-tax) that was a rollover from an old employer's 401k.
• Recently I setup a second Traditional IRA for post tax dollars with the plan to setup a backdoor Roth.
• As I'm learning about the pro rata rule, it seems like this may not be the best plan as the Fed lumps all IRAs into the same bucket, so the money I moved from my second, post tax, IRA would be viewed as a mixture of pre- and post-tax dollars.

Is the pro rata rule something that should concern me, or go ahead and proceed forward with Backdoor Roth and mix pre- and post-tax dollars? Is there potentially a way around the pro rata rule by rolling over the pre-tax IRA into my current company's 401k, or would the pro rata rule apply here as well?

This is just my story, not advice. More a cautionary tale.

I had a 403b that I rolled over to a financial planner early last year. It did not occur to me that in doing that my 403b became an IRA. At the time of the rollover, my FA told me to open a mega backdoor Roth with my employer, but I procrastinated and instead made the usual $6k contribution to my existing Roth, which is done via a backdoor IRA that I've had for several years.

Because I now have two IRAs, and 98% of my total IRA holdings are in the rollover IRA, I owe $1400 in taxes on that $6k contribution. I will (in theory) get some or all of that back, but not until I start taking distributions from my pre-tax IRA. And that won't be for at least another 15 years.

Now, I do my taxes in TurboTax, and depending on what information I choose to input, I can make that $1400 in taxes go away. But everything I've read is that I screwed up, and the tax code clearly states I owe that amount. There is no work around. The only correct solution is what I've described above - take a $6k tax-free distribution from my pre-tax IRA when the time comes. There appears to be a fair amount of record-keeping and "bean counting" associated with that process, too.

So, for 2023, I've opened a mega backdoor Roth and my $6500 will be going there (in addition to any more I want to contribute).

If you can afford the taxes now, maybe that's the right decision for you. I am in my highest tax bracket right now, and doubt I will be in this high of a bracket when I start withdrawing from my IRA - which is why I say I may not get all of that tax payment back.

To say I'm mad at myself is an understatement. I absolutely hate the fact that I owe taxes on that money now. Thankfully, I was set to get a refund that was just slightly more than what I owe, so at least I'm not having to write a check to the IRS. But it would have been nice to have that money back. I will absolutely not put any more money in my Roth through my backdoor IRA now that I have this other rollover IRA.

It appears my way around it would be rolling over my pretax IRA into my 401k (which I have confirmed my 401k does allow), leaving the post-tax IRA intact for a rollover into a Roth IRA. As long as all of this is completed by 12/31/2023 I don't have to worry about the pro rata rule.

TXTransplant, I am curious what a "mega backdoor Roth" is?

txaggie_08 said:

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It appears my way around it would be rolling over my pretax IRA into my 401k (which I have confirmed my 401k does allow), leaving the post-tax IRA intact for a rollover into a Roth IRA. As long as all of this is completed by 12/31/2023 I don't have to worry about the pro rata rule.

TXTransplant, I am curious what a "mega backdoor Roth" is?

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Mega backdoor is an after-tax contribution to your 401k, but a Roth version of it. Not all plans/employers allow it because you have to take in plan distributions (or something like that). But the best thing about it is, it's not capped at $6500 like the regular Roth is. It's capped at the $66k for total 401k contributions (including pre and post tax and employer).

So, say you are maxing out your 401k at $22,500 and your employer is putting another $7500 in it. That's only $30k. You could put up to another $36k of after tax money in the mega backdoor Roth. And it grows tax-free. Most people can't afford to do that, but it's possible.

I'm starting out at around $8k this year and will go from there. I usually do my Roth in a lump sum around this time of year, and it annoys me that these contributions will be spread over time, but it's the best I can do.

I'm with Fidelity and they take care of all the details. The after tax $ goes into a fund that's identical to my existing 401k, and I can't change that. Some people might see the inability to diversify as a downside.

I specifically didn't want my 403b money in my 401k. So I didn't even look into that alternative.

Just wanted to add that for the mega backdoor Roth to work fully is your plan first has to allow after tax contributions. And second it needs to either allow in service distributions and/or in plan Roth conversions.

If you just contribute after tax it will grow tax free but the gains would be taxed when you withdrew the money. It's important to take the second step and either Roth convert it in place or roll it out to your existing Roth IRA.

Also I don't believe the IRS requires you to max out the 22.5k before contributing to the after tax side. So if your plan allows in service distributions or in-plan-roth-conversions and you aren't interested in tax savings now you could elect to just contribute after tax only to your 401k.