Questions on the proposed ban on backdoor Roth contributions

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!

Reply to
Rich
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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 basis and the balances on the date of the transaction, not the subsequent 12/31 amounts.

Ira Smilovitz, EA Leonia, NJ

Reply to
ira smilovitz

Note that my answer above assumes no new contributions of after-tax money to the traditional IRA in the first part of the year.

Ira Smilovitz, EA Leonia, NJ

Reply to
ira smilovitz

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.
Reply to
Rich

You are correct. Not sure why I thought it was otherwise.

Ira Smilovitz, EA Leonia, NJ

Reply to
ira smilovitz

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