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Subject:  Post Fiscal Cliff IRA Conversions Date:  1/6/2013  1:16 PM
Author:  SJColeman Number:  117306 of 132811


With the 2013 change permitting 401k conversions to Roth 401k does this change the pro rata calculation for IRA to Roth IRA conversions?

I.e. now that individuals can convert their active 401k accounts into Roth 401k accounts, do 401k's get lumped in the traditional IRA-type accounts (IRA/SEP/SIMPLE/etc) for the "big undifferentiated pot of money" Traditional IRA pro rata calculation when making a conversion.

The often given example is:

Jack as a Rollover IRA with $45,000 (untaxed contributions) in it. He contributes $5000 into a Traditional IRA and converts it into a Roth IRA. In reality the accounting is that Jack converted 10% of his IRA (the $45,000 in the Rollover PLUS the $5000 in the Traditional IRA). Jack owes taxes of $4500 (90% of the money came from the Rollover IRA). He now has to track that he has $4500 of already taxed money in his Rollover IRA which is a tracking/accounting mess.

A couple of questions?

1) Does the entire 401k account fall into the same bucket as the traditional IRA-type accounts (IRA/SEP/SIMPLE/etc) above in 2013 because the law says you can make a conversion in 2013?
2) Does the entire 401k account fall into the same bucket as the above Rollover IRA in the above example in 2013 if the law says you can convert but your 401k plan says you can’t convert in 2013?
3) I assumed that none of this mess applied in earlier years because 401k’s are not treated the same IRA’s, was that true?

Thanks in Advance,
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