So I see that the proposed tax bill has a ban on backdoor Roth "contributions" by specifying that no after-tax monies an in IRA
or qualified plan can be converted to a Roth IRA no matter what
your income is.
Leaving aside any political wisdom or lack thereof of that,
I'm wondering how the heck that'll even work in practice.
If you have an IRS with some basis, any distributions
(even Roth conversion distributions) get prorated to
determine the taxable and non-taxable part of the distribution.
However, the proration ratio cannot be known until the
following Jan 1 because it depends on the Dec 31 account
balances.
So how the heck is this supposed to work? You do a conversion
in May and then the following January you can finally figure out
what part of the conversion was after-tax money and so not allowed
to have been done? Does the IRS institute a special rule for
Roth conversion distributions so that they're deemed to be pre-tax
first instead of prorated?
And there's another twist. I read the actual language of the law and
to my not-a-lawyer/not-an-EO eyes it sure seems to be saying that
if there's any after-tax basis at all a conversion simply is not allowed period. It has language along the lines of conversions not being allowed
"if any portion of the distribution would be treated as not includible in gross income" -- well, ANY distribution of an IRA with after-tax basis
would have a portion of the distribution that "would be treated as not includible in gross income". Thus this language would seem to make it impossible to do any Roth conversions if your IRA accounts collectively
had even a single dollar of after-tax basis in them. Yikes!
--
Rich
--
On Friday, October 1, 2021 at 1:04:29 PM UTC-4, Rich wrote:basis and the balances on the date of the transaction, not the subsequent 12/31 amounts.
So I see that the proposed tax bill has a ban on backdoor Roth "contributions" by specifying that no after-tax monies an in IRA
or qualified plan can be converted to a Roth IRA no matter what
your income is.
Leaving aside any political wisdom or lack thereof of that,
I'm wondering how the heck that'll even work in practice.
If you have an IRS with some basis, any distributions
(even Roth conversion distributions) get prorated to
determine the taxable and non-taxable part of the distribution.
However, the proration ratio cannot be known until the
following Jan 1 because it depends on the Dec 31 account
balances.
So how the heck is this supposed to work? You do a conversion
in May and then the following January you can finally figure out
what part of the conversion was after-tax money and so not allowed
to have been done? Does the IRS institute a special rule for
Roth conversion distributions so that they're deemed to be pre-tax
first instead of prorated?
And there's another twist. I read the actual language of the law and
to my not-a-lawyer/not-an-EO eyes it sure seems to be saying that
if there's any after-tax basis at all a conversion simply is not allowed period. It has language along the lines of conversions not being allowed "if any portion of the distribution would be treated as not includible in gross income" -- well, ANY distribution of an IRA with after-tax basis would have a portion of the distribution that "would be treated as not includible in gross income". Thus this language would seem to make it impossible to do any Roth conversions if your IRA accounts collectively
had even a single dollar of after-tax basis in them. Yikes!
--
Rich
--Without having read any of the proposed language, I can't comment substantively, but there is one error in your post. When you do a distribution/conversion from an IRA which has after-tax money in it, the ratio is based on the previous year's 12/31
Ira Smilovitz, EA
Leonia, NJ
--
Without having read any of the proposed language, I can't comment substantively, but there is one error in your post. When you do a distribution/conversion from an IRA which has after-tax money in it, the ratio is based on the previous year's 12/31basis and the balances on the date of the transaction, not the subsequent 12/31 amounts.
On Friday, October 1, 2021 at 2:09:32 PM UTC-4, ira.sm...@gmail.com wrote:basis and the balances on the date of the transaction, not the subsequent 12/31 amounts.
Without having read any of the proposed language, I can't comment substantively, but there is one error in your post. When you do a distribution/conversion from an IRA which has after-tax money in it, the ratio is based on the previous year's 12/31
I don't believe that's correct. I just looked
at the instructions for the *2020* For
8606 and they say:
"Line 6
Enter the total value of all your
traditional, SEP, and SIMPLE IRAs as of
December 31, *2020*, plus any
outstanding rollovers. A statement
should be sent to you by February 1,
2021, showing the value of each IRA on
December 31, *2020*. However, if you
recharacterized any amounts originally
contributed, enter on line 6 the total
value, taking into account all
recharacterizations of those amounts,
including recharacterizations made after
December 31, *2020*."
So the proration ratio for conversions made
in Year N sure looks like it will depend on the
account balances as of Dec 31, N and
*not* the balances on Dec 31, N-1 and therefore
the tax status of the conversion distribution will
not be known at the tome of the conversion.
--
Rich Carreiro
--
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