Personal Finance (Not Investing) • Fidelity dividend EOD on 12/31 in IRA - prorata rule applies?

I am upset because I spent the 2nd and 3rd weeks of December feverishly trying to roll the IRA back into the 401k just to avoid the prorata tax (after figuring my original mistake in December 2nd week). I had to call Fidelity and my old employer multiple times in anguish to get the reverse rollover done racing against time. Fidelity reps screwed up the process a couple times as well. And after going through all that pain and succeeding in barely enough time on December 22, I am now hit with this unexpected dividend out of the blue on the 31st. That is why I am upset.

Anyway I guess I should be thankful I averted a major disaster and only have to pay a small prorata tax ($384 vs $685k IRA balance).

As livesoft said, it's not a big deal. Where pro-rating causes a problem is when, as you successfully avoided, you have large deductible (zero basis) balance in an IRA and then make a back door contribution only to find that a large percentage (about 99% to use your $685K example above) is taxable. For your current situation, due to the $384 zero-basis balance at year-end, about 4.5% of your $8,500 conversion will be taxable (about $365). That $365 is also the basis of the $384 currently in the IRA. Tomorrow, you can convert the $384 to the Roth and only $19 of it it will be taxable. Yes, it complicates your tax return preparation a little due to it being in two tax years but you were going to pay tax on that $384 at some point.

Also, in your first note you said "I backdoor converted the max $8500 at the start of 2024?" There is no limit on conversions, only on contributions. And a backdoor Roth contribution is for tax purposes, two independent transactions - a tIRA contribution and a tIRA to Roth conversion.

Statistics: Posted by scorp_pccorp — Wed Jan 01, 2025 3:42 pm — Replies 5 — Views 147