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The way I understand the pro-rata rule is that if you have $5K in T-IRA (deductible), open and contribute $5K to a new T-IRA (non-deductible), then decide to convert the latter $5K into Roth IRA, you will owe tax on $2.5K because in this case $2.5K came out of deductible and $2.5K of non-deductible T-IRA.

With that being said I have two question:

  1. If I have $5K (T-IRA deductible) with VanGuard and have another $5K (T-IRA deductible) with TRowe. Am I right to assume that in the eyes of IRS it doesn't matter which organization the T-IRA is in, and if I want to contribute to non-deductible IRA for the purpose of a transfer to Roth, I should take both in consideration, regardless of with which institution I will create a new T-IRA (non-deductible) plan? Which means I will pay tax on roughly $3333 in this case.

  2. Similarly if I have a variable annuity with NWM, is that considered as an T-IRA in this case?

Thank you

  • For the purposes of backdoor Roths (as well as other purposes), all your Traditional IRA accounts (no matter where they are held) are considered to be the same. If you make a $5K non-deductible contribution, that $5K$ is included in what is called the basis of your IRA, and when you do a rollover, the roillover amount is deemed to have been taken proportionately from the taxable part and the nontaxable part (basis) no matter which account you withdraw it from. – Dilip Sarwate Sep 7 '15 at 22:04
  • @DilipSarwate I wrote the answer before I saw your comment, why didn't you write it as an answer? – littleadv Sep 7 '15 at 23:17
  • @littleadv I was in a rush to run some errands and besides I did not have an answer for the second question re annuities. So I figured a comment is best. – Dilip Sarwate Sep 7 '15 at 23:42
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Am I right to assume that in the eyes of IRS it doesn't matter which organization the T-IRA is in, and if I want to contribute to non-deductible IRA for the purpose of a transfer to Roth, I should take both in consideration, regardless of with which institution I will create a new T-IRA (non-deductible) plan?

Yes. It doesn't matter how many accounts across how many custodians you have, it all goes into one single aggregate that is used for the taxable portion calculation.

Similarly if I have a variable annuity with NWM, is that considered as an T-IRA in this case

If it is purchased under IRA then yes.

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