IRA

[gk]

Hi

One of my client's wife contributed pre-tax dollars to a simple IRA account in 2016 as part of her company’s retirement plan. She did not contribute money to the simple IRA account the last few years as the company has switched to a 401k plan. They otherwise have no IRA accounts. This year she and her husband each opened new traditional IRA accounts and contributed post tax dollars to it and then converted it to a Roth IRA. The Simple IRA has a cost basis of $5,730 and market value of $13,844. They contributed 12k for each of them into the backdoor Roth IRA (6k for 2021 and 6k for 2022).   Will they be responsible to pay taxes on the conversion of the traditional IRA to the Roth IRA? Their concern is that the Simple IRA will be considered to be a traditional IRA  or 401K by the IRS and the conversion of the new traditional IRA that they opened this year will be considered distributions as part of the pro-rata rule/ “cream in your coffee” rule. Please reply

GK

[sjrcpa · Accepted solution]

A SIMPLE IRA = IRA.

So yes it counts when you do the taxable amount calculation.

[qbteachmt]

"The Simple IRA has a cost basis of $5,730"

I doubt it. The word "SIMPLE" means "Savings Incentive Match Plan for Employees" and does not mean "basic" or "plain." It does not mean generic, either. It is different than Traditional IRA (which is not done through an employer) and different than 401(k) plans.

Pre-taxed contributions and employer matches are not Basis. They were never taxed, going in.

"and contributed post tax dollars to it and then converted it to a Roth IRA. The Simple IRA has a cost basis of $5,730 and market value of $13,844."

It's contributions, not basis. And these will always be Per Individual. There is no Joint event for retirement activities.

"They contributed 12k for each of them into the backdoor Roth IRA (6k for 2021 and 6k for 2022). Will they be responsible to pay taxes on the conversion of the traditional IRA to the Roth IRA?"

A person can't do Backdoor that is tax free if there is pre-tax and never-taxed money in a similar type of account, such as what you see on Form 8606. There will be prorated taxes, based on that Nondeductible amount against all never taxed amounts. A SIMPLE IRA would be a No Basis, Never Taxed, amount.

"Their concern is that the Simple IRA will be considered to be a traditional IRA or 401K by the IRS"

The IRS knows what SIMPLE IRA is.

"and the conversion of the new traditional IRA that they opened this year will be considered distributions as part of the pro-rata rule/ “cream in your coffee” rule."

It's not considered distribution; but it is partially taxable. Look at the Form 8606 instructions to see that Trad IRA, SEP, and SIMPLE IRA are lumped together for purposes of a conversion Pro Rata computation.

[gk]

Thank u so much