facebook twitter instagram linkedin google youtube vimeo tumblr yelp rss email podcast phone blog external search brokercheck brokercheck Play Pause

Q&A: "Can I Avoid the Pro-Rata Tax Rule on Back Door Roth Conversions?"

Retirement Accounts Tax

Question and background: 

Can I avoid the pro-rata tax rule on back door Roth conversions? 

My idea is to move existing traditional IRA monies (pre-tax and tax deferred growth) to a different type of tax deferred instrument such as a tax deferred annuity, THEN open a traditional IRA with post-tax money and quickly convert to a Roth IRA? This "cleans my slate" of any traditional IRAs the government would include in my tax liability during conversion from traditional IRA to Roth IRA. Is this correct?


Your understanding is close, but not quite right. 

To do what you're describing, you need to directly transfer your Traditional IRA funds to a tax-deferred account (not instrument) that can accept the transfer. It has to happen at the plan/account level, not the investment/instrument level. For example, transfer from a Traditional IRA to your 401(k) plan.

Technically, a tax-deferred annuity itself is an insurance product (instrument), not a qualified type of retirement account. 

Now, if your 401(k) plan offers this tax-deferred annuity as an option in the plan's investment line-up, then you'd be OK tax-wise with what you're proposing. But otherwise, you'd either be fully distributing your IRA (tax ouch!) in order to buy the annuity or you'd simply be investing in the annuity within a different IRA (same conversion issue you started with).

Hope that helps. All the best!