Backdoor Roth vs Megabackdoor Roth Tax Implications

Freetax8

From what I am reading…

-For a backdoor Roth - The situation is that I have an existing traditional IRA from previous 401k contributions which are all pretax. If I create a new account to house annual after-tax contributions that are to be converted to ROTH via backdoor conversions, does the pro rata rule applies in this case?

-For a mega backdoor ROTH - The situation is that my employer allows for after tax contributions. I will still have traditional IRA at another institution with previous 401k contributions that were all pretax. If I start to employer's plan for after tax contributions to my 401k and convert those to ROTH, does the pro rata law apply to convert those after tax contributions to ROTH?

MatthewD

Hi Freetax8,

Scenario #1: Yes, the pro-rata rule applies. The IRS aggregates all your traditional, SEP, and SIMPLE IRA accounts—regardless of whether they are in new or old accounts—to determine the tax liability of a Roth conversion. Creating a separate account for after-tax contributions does not isolate them from the pre-tax funds.

Scenario #2: No, the pro-rata rule does not apply to your outside traditional IRA when converting after-tax 401(k) contributions to a Roth account via a Mega Backdoor Roth. The pro-rata rule, which aggregates all traditional IRAs, only applies to backdoor Roth IRA conversions, not to in-plan conversions or rollovers from a 401(k).