401k to Roth IRA conversion - pro-rata question
I have a 401k completely funded with pre-tax dollars but would like to begin funding it with after-tax dollars and converting those to a Roth IRA with in-plan distributions. For this example let’s assume the after-tax dollars don’t accrue any gains prior to their conversion to the IRA.
The IRS states that any conversions need to include part of the pre-tax funds in the 401k (from IRS website, below):
“Can I roll over just the after-tax amounts in my retirement plan to a Roth IRA and leave the remainder in the plan?
No, you can’t take a distribution of only the after-tax amounts and leave the rest in the plan. Any partial distribution from the plan must include some of the pretax amounts.
Notice 2014-54 doesn’t change the requirement that each plan distribution must include a proportional share of the pretax and after-tax amounts in the account. To roll over all of your after-tax contributions to a Roth IRA, you could take a full distribution (all pretax and after-tax amounts), and directly roll over:
Pretax amounts to a traditional IRA or another eligible retirement plan, and after-tax amounts to a Roth IRA. “
What is not clear is how a Mega-Backdoor strategy works given the above? Could I assume that if my plan provider separates pre-tax and after-tax in different buckets that I will not have to convert any pre-tax funds? Or will I need to convert a percentage of my pre-tax 401k when converting any after-tax contributions?
Posted Nov 1, 2023, 3:56 PM UTC