Question and background:
I am considering rolling over my 401(k) into a traditional IRA (new job). How does this affect my ability to do a backdoor Roth conversion? For the past few years, my wife and I have done backdoor Roth conversions, and plan to in the future. This would be my only traditional IRA if I did it.
If you roll your 401(k) into a Traditional IRA, then you'll be required to pro-ratethe taxable income of any "backdoor" Roth conversion.
For example, suppose you have a Traditional IRA balance of $49,500 and you make a non-deductible contribution of $5,500 to it, with the intention that you'll "backdoor" that $5,500 into your Roth IRA. The non-deductible contribution is 10% of your total IRA balance (now at $55,000). That means only 10% ($550) of your $5,500 will be non-taxable when you do the backdoor Roth. You'll have to pay taxes on conversion of the other $4,950.
Since you plan to continue using the backdoor Roth strategy into the future, then strictly from a strategy standpoint it may make more sense to leave your balance in the 401(k) instead of rolling it to an IRA. No pro-rata calculations in that case.
Hope that helps. All the best.
Originally posted on NerdWallet's Ask an Advisor on June 17, 2014.