Backdoor Roth IRA and Pro-rata Rule

5 Replies

Hello everyone!

Could you please help with my situation? I want to do a Backdoor Roth but I have pre-tax money on my trad IRA and I don't understand whether the pro-rata rule could be avoided if I do the following:

1) All money on my trad IRA is pre-tax.
2) I want to open Solo 401(k) and transfer all pre-tax money (10k) from trad IRA to Solo 401(k).
3) When the balance on trad IRA will be zero I am going to add after-tax money to my trad IRA up to the yearly limit (6k).
4) I am converting all after-tax money from trad IRA to Roth IRA.
5) To the end of the year I will have trad IRA with zero dollars, Solo 401(k) with after-tax money (10k), and Roth IRA with after-tax money (6k).

Will pro-rata rule be avoided if I do 1)-5) in one year?

Thank you very much!

Originally posted by @Alex Yakubovich :

Hello everyone!

Could you please help with my situation? I want to do a Backdoor Roth but I have pre-tax money on my trad IRA and I don't understand whether the pro-rata rule could be avoided if I do the following:

1) All money on my trad IRA is pre-tax.
2) I want to open Solo 401(k) and transfer all pre-tax money (10k) from trad IRA to Solo 401(k).
3) When the balance on trad IRA will be zero I am going to add after-tax money to my trad IRA up to the yearly limit (6k).
4) I am converting all after-tax money from trad IRA to Roth IRA.
5) To the end of the year I will have trad IRA with zero dollars, Solo 401(k) with after-tax money (10k), and Roth IRA with after-tax money (6k).

Will pro-rata rule be avoided if I do 1)-5) in one year?

Thank you very much!


Alex, see below. 

If I were you, I would close the old traditional IRA account after solo 401k rollover and just open a new Tra IRA for your backdoor conversion. That will solve all the issues.


2) I want to open Solo 401(k) and transfer all pre-tax money (10k) from trad IRA to Solo 401(k).

- Once you make this rollover, you have no balance in your IRA.
3) When the balance on the trad IRA will be zero I am going to add after-tax money to my trad IRA up to the yearly limit (6k).

- This will give you a basis in IRA with a nondeductible contribution because you have no pre-tax amount now. 


4) I am converting all after-tax money from trad IRA to Roth IRA.

- If no earnings- Since the conversion is of the non-deductible contribution, the prorate rule is not required

-If there are earnings on the nondeductible contributions before the backdoor contribution of these amounts to a Roth IRA, then a portion of the amount distributed from the traditional IRA would be includible in gross income (as per the exclusion ratio for IRA distributions), under which the excludable portion of the IRA distributions for the year is determined by multiplying (1) the amount of the distributions by (2) the ratio of (a) nondeductible contributions, over: (b) the sum of (i) the aggregate balance of all the individual's traditional IRAs on the last day of the tax year, (ii) the sum of all IRA distributions for the year, (iii) outstanding rollovers, and (iv) amounts converted to a Roth IRA from a traditional IRA, SEP, and SIMPLE IRAs.




Thank you for answers!


I have one more question about the pro-rata rule though.

Let's assume I have tIRA with $16k where $10k is pre-tax money and $6k is after-tax money. Do I have to pay taxes if I transfer $16k from tIRA to Roth IRA and on December 31 I will have tIRA with zero balance? It looks like the pro-rata rule will not work in this case because it should be calculated on Dec 31 where the balance of tIRA is zero for me. On the other hand, from $16k there was $10k pre-tax money. So do I need to pay taxes anyway in this case?

Originally posted by @Justin Windham :

@Alex Yakubovich

If the Solo 401k you are planning to set up allows for after-tax contributions, you may be able to utilize the mega backdoor Roth strategy to get quite a bit more than $6k in annual Roth additions.

If I have a larger 401K Rollover IRA with mostly, but not all Pre Tax money is the Pro Rata rule avoidable? Does it make any difference if I have a separate current employer plan that I could roll those 401K Rollover IRA funds into?

I don't have any plans to establish a Solo 401K.