Roth Conversion Issue

[bzorc]

Here are the facts of a situation I've not heard of:

As of 12/31/22, individual taxpayer has no IRA accounts. AGI around $1,000,000, which is expected to be the same in 2023.

In Janaury, 2023, individual makes a 2023 non-deductible IRA contribution of $7,500 (over age 50), and immediately converts it to a Roth.

In September, 2023, individaul rolls over a prior retirement plan balance into a Traditional IRA.

Question: Would the entire Roth conversion of $7,500 be considered non-taxable, or would the individual have to consider the rollover traditional IRA to determine if a portion of the conversion, for earnings, is taxable.

Thanks for any replies.

 

[Lou S.]

My understanding is the pro-rata rule is applied on 12/31 of the year of conversion. In this case only a small portion of the conversion is likely to be tax free.

A way around would be to roll the qualified plan money back into a qualified plan before 12/31/2023 to zero out his pre-tax IRA balance.

But I'm not a CPA so you might want to discuss this with one as my understanding is simply free advice which is often worth what you pay for it.

[bzorc]

Thanks for the response. Don't think this person consulted with his CPA before doing it.