Roth conversion confusion

[always_learning]

A while back, I asked for info on converting dh's 401k to an IRA and you all were very helpful. We are planning to do this soon-ish and today I am back with more questions, now that I've looked into the pro rata stuff.

1. I read on Ed Slott's page that one should not do a rollover and conversion in the same year because it messes with the pro rata number since the conversion isn't based on the date of conversion, but the balance at the end of the year. What? Why, then, do I keep reading blurbs about converting when the market is low? Does that only have to do with 100% balance conversions?

2. When we move dh's 401k to an IRA, we planned to convert some almost right away, so the above will affect us because he already has a ROTH IRA, correct?

3. How does the company stock come into play here if we roll it all? Is that removed from the pro rata amount since at the end of the year, it will be real stock and not in an IRA?

4. If we wait to roll the 401k and decide to convert within the 401k (which is an option), is the company stock added to the total for pro rata reasons?

5. If you had a small ROTH IRA and a large 401k with a mix of mostly pre tax & small post tax and company stock with significant NUA, would you roll it all to an IRA and convert or leave the 401k and convert to 401k ROTH?

I'm still leaning towards rolling it & taking the NUA, and just dealing with the small ROTH in the pro rata number, but I wanted advice from those who have walked before me.

I do hope this post isn't confusing. I wrote and rewrote it several times.

 

[SevenUp]

It appears there may be some mixing of the concepts regarding the Backdoor Roth process, vs. a Roth IRA conversion. Can you clarify?

One point: in no case and at no time does the amount in a Roth IRA matter to either of the above.

 

[always_learning]

It appears there may be some mixing of the concepts regarding the Backdoor Roth process, vs. a Roth IRA conversion. Can you clarify?

One point: in no case and at no time does the amount in a Roth IRA matter to either of the above.

Definitely not a Backdoor Roth thing.

Here is the Ed Slott article on conversions and pro rata that confused me. Item #4 is where the part about the rollover/existing Roth and rolling over employer plans in one year is mentioned.

https://www.irahelp.com/slottreport/4-things-know-about-roth-ira-conversions-and-pro-rata-rule

 

[Dash man]

Definitely not a Backdoor Roth thing.

Here is the Ed Slott article on conversions and pro rata that confused me. Item #4 is where the part about the rollover/existing Roth and rolling over employer plans in one year is mentioned.

https://www.irahelp.com/slottreport/4-things-know-about-roth-ira-conversions-and-pro-rata-rule

If I understand correctly, pro rata rule applies if you’re doing a partial rollover. You have to take proportional amounts of your pretax, after tax and Roth contributions to rollover into new IRAs.

In my case, I rolled my entire 401k into my traditional IRA and Roth IRA at the same time. Roth contributions and after tax contributions roll into the Roth. Pretax contributions, earnings from after tax contributions and all employer match, whether in company stock or other things all go into the traditional IRA.

 

[always_learning]

If I understand correctly, pro rata rule applies if you’re doing a partial rollover. You have to take proportional amounts of your pretax, after tax and Roth contributions to rollover into new IRAs.

In my case, I rolled my entire 401k into my traditional IRA and Roth IRA at the same time. Roth contributions and after tax contributions roll into the Roth. Pretax contributions, earnings from after tax contributions and all employer match, whether in company stock or other things all go into the traditional IRA.

That's how I understand it, too.

What confuses me is when the article I linked said to not also convert a portion of that money into a Roth in the same tax year because it will mess up the pro rata number. I'm trying to understand the ramifications of this as I've not seen that advice anywhere else. Maybe it only messes with that first pro rata number since it uses the balance of the total amount on the last day of the year which includes a Roth IRA that wasn't even touched?

I'm obviously not doing a good job of explaining why i'm confused and why I'm asking for advice on the best way to do this. Thanks for bearing with me.

 

[Dash man]

That's how I understand it, too.

What confuses me is when the article I linked said to not also convert a portion of that money into a Roth in the same tax year because it will mess up the pro rata number. I'm trying to understand the ramifications of this as I've not seen that advice anywhere else. Maybe it only messes with that first pro rata number since it uses the balance of the total amount on the last day of the year which includes a Roth IRA that wasn't even touched?

I'm obviously not doing a good job of explaining why i'm confused and why I'm asking for advice on the best way to do this. Thanks for bearing with me.

First of all, Roth IRAs are not included in any prorated balances.
Second, yes, your company stock will be considered pretax once rolled into a tIRA.
If you roll after tax funds into your traditional IRA, or have after tax contributions to a tIRA, those will be included in a prorated conversion.
If your 401k plan has the option to separate after tax contributions into a Roth IRA while rolling your pretax into a tIRA, that’s what I did and would recommend.
Third, if you do have any after tax funds in your tIRA, they will prorate your conversions or distributions until fully distributed. They will lower your tax liability for those distributions.
I don’t know why they recommend not doing rollovers and conversions the same year. I did not. As long as you file form 8606, I don’t see the big deal.

 

[N02L84ER]

I think the Ed Slotte article is saying if you have post tax (nondeductible) IRA money that you wish to convert this year, then do not do your rollover from the 401K to the IRA until next year.

 

[SevenUp]

definitely not a backdoor roth thing.

Here is the ed slott article on conversions and pro rata that confused me. Item #4 is where the part about the rollover/existing roth and rolling over employer plans in one year is mentioned.

https://www.irahelp.com/slottreport/4-things-know-about-roth-ira-conversions-and-pro-rata-rule

that's how i understand it, too.

What confuses me is when the article i linked said to not also convert a portion of that money into a roth in the same tax year because it will mess up the pro rata number. I'm trying to understand the ramifications of this as i've not seen that advice anywhere else. Maybe it only messes with that first pro rata number since it uses the balance of the total amount on the last day of the year which includes a roth ira that wasn't even touched?

I'm obviously not doing a good job of explaining why i'm confused and why i'm asking for advice on the best way to do this. thanks for bearing with me.

i think the ed slotte article is saying if you have post tax (nondeductible) ira money that you wish to convert this year, then do not do your rollover from the 401k to the ira until next year.

You may not be thinking of the backdoor Roth process, but the pro-rata rule is (most?) often associated with it, as n02l84er alludes.

Ignore Roth IRA balances completely - do you understand why? See Form 8606, particularly the instructions for lines 2 and 6.

Filling a draft form 8606 may be a useful exercise to understand better what the "pro-rata" (line 10) thing is all about.

 

[always_learning]

Oh man, I've got it.

I had form 8606 printed off to tackle tomorrow to see if that would help, but now I can just save it for some 'what if' scenarios.

The Ed Slott article does refer to *IRA* conversions before the 401k rollover occurs because the money in the IRA will still be in the pro rata configuration. I guess I just needed a few more words added to that explanation for clarity.

Thank you all for your help. I have stewed on this for a couple of days now and just couldn't seem to get the correct terminology to do a targeted search.

Thanks again. I really appreciate it!

 

[Dash man]

Oh man, I've got it.

I had form 8606 printed off to tackle tomorrow to see if that would help, but now I can just save it for some 'what if' scenarios.

The Ed Slott article does refer to *IRA* conversions before the 401k rollover occurs because the money in the IRA will still be in the pro rata configuration. I guess I just needed a few more words added to that explanation for clarity.

Thank you all for your help. I have stewed on this for a couple of days now and just couldn't seem to get the correct terminology to do a targeted search.

Thanks again. I really appreciate it!

We’ll send a bill. [emoji12]