I expect that in 2022, my income will exceed the deduction limits for a traditional IRA, so any contributions I make to it will be non-deductible. My understanding is that once I make a non-deductible contribution to my traditional IRA, I could, in the future, be subject to the pro rata rule.
However, 401(k) plans, including traditional Individual 401(k) plans, don't seem to be subject to the pro-rata rule. Can I follow this process to avoid the pro rata rule in the future?
- Apply for a federal EIN as a sole proprietor.
- Use that EIN to set up an Individual 401(k) plan at a place like Vanguard
- Roll over all of the funds in my current traditional IRA (which, as of now, are all pre-tax) into the traditional Individual 401(k)
This seems like a "too good to be true" loophole in the pro rata rule. It sounds very clever but my default assumption is that it's either wrong or that the IRS is considerably more clever than me googling things. Even though my sole proprietorship wouldn't have any income (because I'm a W2 employee for my actual employer), rollover contributions aren't subject to the $57K annual contribution limit.