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Starting this year, I can no longer contribute to my ROTH IRA. I have three other IRAs:

  • A rollover IRA (pre-tax), opened in 2020 when I rolled over an old 401k.
  • A SIMPLE IRA (pre-tax), opened in 2020 with my old employer.
  • A traditional IRA, containing $3k of post-tax contributions, uninvested, which I opened last week, intending to put $6k in there and do a backdoor ROTH IRA contribution.

After I opened the traditional IRA and put the $3k, I learned more about the pro rata rule. I understand that if I do the backdoor ROTH this year, equal amounts will need to be converted from each of the above IRAs, resulting in my needing to pay some taxes.

Optimally, I'd love to convert the rollover and SIMPLE IRAs into a new 401k which my current company is making available soon. However, I don't think I can do that because of how recently the rollover and SIMPLE IRAs were opened.

I want to get as much money into my ROTH as possible so I can enjoy tax-free growth. I'm only 27 so this is significant.

Given my situation, what's the best course of action here? Should I do pro rata conversions every year until I'm able to roll my pre-tax IRAs into my new 401k? I have the money to pay the taxes I need to, if that's the best decision in the long run.

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    Where are you seeing there is a constraint on how long you need to have an IRA before reverse rolling it over into your 401(k)? – user106227 Mar 7 at 17:46
  • Is the traditional IRA contribution for last year, or this year? – Craig W Mar 7 at 18:21
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    OK, hang on. You actually have a two-year holding period on your SIMPLE IRA from the first contribution. (Handy chart.) – user106227 Mar 7 at 23:00
  • @CraigW I made the 3k traditional IRA contribution for 2021. – David Gay Mar 8 at 15:39
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There is no time or amount limit for conversions (except processing time between contributions and conversions, so maybe two days inbetween).

You can convert all your SEP IRAs and Traditional IRAs today (or any other day) if you want to (but consider the taxes that you will have to pay for it).

This is independant of pre-tax and / or post-tax contributions - post-tax conversions will be tax free; pre-tax conversions are taxable, but they are always considered ’merged’ by the IRS, no matter how clear you separate them, so any conversion is always a proportional mix.

Once you merged pre- and post-tax money, it’s merged, until you empty all your IRAs past a year change; and you need to keep track with form 8086 (or get double taxed).

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  • You can't do posttax conversions independently of pretax conversions. Any conversion of balances in traditional IRAs are subject to the pro-rata rule; the amount you convert will be prorated between your posttax and pretax balances in their proportion across all your traditional IRAs. (This is the purpose of Form 8606, which you file each time you contribute or Roth-convert any traditional IRA balance which contains a posttax portion.) – user106227 Mar 7 at 22:47
  • I am aware of that; I didn’t try to imply different. I’ll adjust the wording. – Aganju Mar 8 at 1:24
  • @Aganju If I'm understanding you right, you're saying I could literally convert my IRAs to ROTH IRA at any time (except for the the 2-year wait for the SIMPLE IRA). Furthermore, it sounds like there isn't any downside to doing the pro rata conversions other than the need to pay taxes now. Which seems like the way to go, since I'd then get tax-free growth for decades. – David Gay Mar 8 at 15:49
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    @KevinArlin re. your reply to Aganju -- not precisely. Let's say your AGI is 50k and your average tax rate is 20%. You can pay 10k in tax this year, contribute 6k to a Roth this year, and let it grow to 60k for a net gain of 60k-6k-10k=44k. Or, you can pay (50k-6k)*20%=8.8k in tax this year, contribute 6k to a traditional this year, it grows to 60k, and you pay 60k*20%=12k in tax on withdrawal for a net gain of 60k-6k-8.8k-12k=33.2k. The point is that your traditional contribution is pretax dollars, so it doesn't go as far as an equal amount in Roth posttax dollars. – user106227 Mar 10 at 21:37
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    Then why is a traditional IRA useful? (1) You'll notice my calculations are combining cash flows from different times: before and after the capital gain occurred. This isn't valid because of the time value of money. Many people want to take the tax deduction to pay less in taxes now. (2) I've assumed throughout that tax rate is constant at 20%, which is patently untrue. If you reckon your tax rate will decrease, you should contribute to a traditional and withdraw/convert when your tax rate decreases. It's a way to smooth income over your lifetime. – user106227 Mar 10 at 22:00
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I would keep the money in your traditional IRA and look into rolling your other IRAs into your current 401(k). Once you get that done, then you can freely convert your Traditional IRA, and only pay tax on the gains. As Aganju mentioned in their answer (which this is somewhat an extension of), there is no time limit on conversions. So you could leave this money in your traditional IRA for several years until it is advantageous to do the conversion, if necessary. If you really want to minimize your taxes, you could even roll over the earnings in your traditional IRA as well, and only leave the non-deductible basis, so there would be zero tax on the conversion.

If there is really no chance you'll be able to get your other IRA money into a 401(k), then you should do a withdrawal of excess contributions with your brokerage. But there is no rush because you have until you file your 2021 taxes, which should be at least a year away.

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  • This is useful info. So (1) I can roll over my pre-tax IRAs into my 401k and leave the post-tax traditional IRA behind, and (2) I can safely invest my money in the traditional IRA, and just pay tax on the gains when I eventually roll it into my ROTH. Is that correct? The one thing I don't follow on is the withdrawal of excess contributions you mention. Though it's true I can't roll over my SIMPLE in 2021, I only plan to put the $6,000 limit into my IRA this year. What would cause me to need to withdraw excess contributions? – David Gay Mar 9 at 19:27
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    @DavidGay Yes both (1) and (2) are correct. The only reasons you'd want to withdraw your contributions is if your 401(k) doesn't accept incoming rollovers, or for some reason you don't want to roll over the money, e.g. your 401(k)'s fees are too high. In those cases I'd advise withdrawing the money rather than leaving it in non-deductible traditional IRA status indefinitely. – Craig W Mar 9 at 19:36
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I'd suggest you withdraw your $3k after-tax contribution. You can do this by 15 October with an extension or amended return. You'd pay tax on the gains, which should be minimal since you didn't invest the $3k.

Then, you can do a combination of the following to get to a zero balance on your pretax IRA:

  • convert your pretax IRAs to Roth to pay taxes now and get tax-free growth
  • if your 401(k) accepts rollovers from IRAs, reverse rollover your pretax IRAs to your traditional 401(k) to pay no taxes now

Finally, make a new $6k posttax contribution. This, you must do by 15 April; extensions aren't allowed.

Aganju points out that the sequence of events is immaterial. And in any case, what I'd said was incorrect; any conversion or rollover you do in calendar 2021 can only show up in your 2021 tax return. So it looks like the only thing you can do to not trigger the pro-rata rule is to skip your 2020 contribution.

You'll have to either:

  • live with it and file Form 8606 each year you contribute or Roth-convert posttax balances, or
  • withdraw the 2020 contribution you've made and not make any posttax contributions without first clearing out the entire IRA's balance using a reverse 401(k) rollover / Roth conversion (and for the SIMPLE IRA, you'd have to wait two years from your first contribution).
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    This would be useless and unnecessary- all activity within the calendar year is consider one activity, the sequence doesn't matter, and there is no need anyway. – Aganju Mar 7 at 19:28
  • @Aganju Good point about the sequence not mattering; I edited my answer. – user106227 Mar 7 at 22:45
  • From the other answers, it sounds like I can still make my 2021 contribution to a traditional IRA, but can wait to convert it to ROTH until 2022, after I've rolled over my other IRAs into a 401k. That way I'd avoid the pro rata rule. – David Gay Mar 10 at 14:54
  • Yeah, I agree. My answer was incorrectly assuming that your 3k contribution was for 2020, but it sounds like you made the contribution for 2021, so what I said doesn't apply to you. – user106227 Mar 10 at 19:26

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