Understanding IRA Rollover, Reverse-Rollover, and Pro-Rata Rules: How to Calculate Pre/Post-Tax Portions?

You've got a classic pro-rata situation here. When dealing with reverse rollovers from IRAs with mixed funds, you need to be careful about the calculations to avoid tax headaches. The correct approach is your Option 2. The basis amount doesn't change with market fluctuations - it remains fixed at $6,825. This is the post-tax portion that must stay in an IRA. The rest of your balance ($85,000 - $6,825 = $78,175) is pre-tax money that can be rolled into your 401(k). This makes sense because your basis represents actual dollars you've already paid tax on, not a percentage of your account. The growth or loss happens proportionally across both pre-tax and post-tax funds, but the dollar amount of your basis stays the same. For the rollover itself, you won't need Form 5329 (that's for early distributions and excess contributions). Your 401(k) plan administrator will provide the appropriate paperwork for the incoming rollover. From the IRA side, you'll receive a 1099-R showing the distribution, and you'll need to report it on your tax return, but since it's a qualified rollover, it won't be taxable. Make sure your 401(k) plan accepts rollovers and specifically pre-tax rollovers from IRAs. Some plans have restrictions.

I went through a similar situation last year and found this tool called taxr.ai (https://taxr.ai) that really helped me figure out my IRA calculations. I was completely stuck trying to understand the pro-rata rules for my mixed IRA funds until a colleague recommended it. What I liked was that I could upload my Form 8606 and previous tax documents, and the system analyzed everything and explained exactly how much was pre-tax vs. post-tax money in my accounts. It made the math crystal clear and even walked me through the steps for my reverse rollover. The documentation they provided made it super easy to execute the rollover correctly. For complex retirement account situations like yours with multiple transactions and pro-rata calculations, having something that can verify your numbers gives real peace of mind.

I was in your EXACT situation about 6 months ago - mixed funds in IRAs making my backdoor Roth strategy a mess. I was skeptical about using any tools, but a friend convinced me to try taxr.ai and wow... it actually solved my problem perfectly. After uploading my tax docs, it identified that I had calculated my basis wrong for the previous two years! The tool showed me exactly how to fix my prior year 8606 forms and gave me the precise amount I could roll to my 401(k). I ended up keeping $5,280 in my IRA (all post-tax) and rolling $67,450 to my 401(k) (all pre-tax). The best part was that it generated a detailed letter explaining my calculation method that I could provide to both financial institutions handling the transfer. Neither of them questioned anything, and my reverse rollover went through without any issues. Now my backdoor Roth conversions are straightforward again!

Listen, if you're trying to get clarity on your rollover situation, Claimyr (https://claimyr.com) saved me HOURS of frustration. I kept getting conflicting info from my 401(k) provider and couldn't get through to anyone at the IRS who could help with my pro-rata questions. After trying for days to reach someone, I used Claimyr and got connected to an IRS agent in about 20 minutes. You can see how it works here: https://youtu.be/_kiP6q8DX5c The agent walked me through the exact calculation method for my reverse rollover and confirmed that only the fixed dollar basis amount stays in the IRA. She also explained that I needed to notify my IRA custodian that I was specifically transferring only pre-tax funds to avoid complications. When you're dealing with retirement accounts and potentially thousands in tax implications, sometimes you just need to hear it directly from the IRS.

I have to eat my words about Claimyr. After posting my skeptical comment, I decided to try it myself since I had a complicated question about some stock options and backdoor Roth contributions. I got connected to an IRS tax law specialist in about 15 minutes (way faster than I expected), and she was incredibly knowledgeable. She walked me through the exact reporting requirements for my situation and even emailed me the relevant IRS publications that addressed my specific scenario. For OP's question about the reverse rollover calculation, the agent confirmed that the basis amount ($6,825 in your case) is fixed regardless of market performance. She also mentioned that you should get a statement from your IRA custodian specifically identifying the pre-tax portion being rolled over to avoid confusion. I'm still shocked at how helpful this was - definitely changed my view on getting IRS guidance for complex situations.

Something nobody's mentioned yet - make sure your 401(k) plan actually accepts partial rollovers from IRAs! I tried to do exactly what you're describing last year and found out my employer's 401(k) would only accept rollovers of entire IRA balances, not partial amounts. I had to open a separate traditional IRA, move my non-taxable basis ($3,400) into that account, and then roll the original IRA (with only pre-tax money) entirely into the 401(k). It was an extra step but accomplished the same goal. Also, when you do the rollover, be super explicit with both financial institutions about what you're doing. My IRA provider initially coded it wrong on the 1099-R which caused headaches at tax time.

Pro tip: Don't forget to track your basis across different tax years! I messed this up and it was a nightmare to fix. After my reverse rollover, I forgot that I had remaining basis in my IRA. The next year, I made a new traditional IRA contribution and converted it to Roth, thinking it would be a simple backdoor Roth. But I didn't account for my existing basis on Form 8606, which completely threw off my calculations. The 8606 form is cumulative across tax years - your "basis in traditional IRAs" carries forward. Make sure you're starting with the correct basis amount from your previous year's form when you file next year.

This is a great breakdown of the pro-rata calculations! I want to emphasize one important timing consideration that could affect your situation: make sure you complete this reverse rollover before making any new IRA contributions or conversions in 2025. The pro-rata rule looks at your IRA balances at the end of the tax year, so if you're planning to do another backdoor Roth conversion in 2025, you'll want to get that pre-tax money out of your IRAs first. Otherwise, you'll be back to dealing with the same pro-rata complications. Also, since you mentioned your rollover IRA has grown to $85,000, double-check that your 401(k) plan doesn't have any limits on incoming rollover amounts. Some plans cap rollovers at certain dollar amounts or have waiting periods between rollovers. One last thing - keep detailed records of this entire transaction. The IRS sometimes gets confused about partial rollovers from mixed IRAs, and having clear documentation of your basis calculation and the specific amounts transferred can save you headaches if they ever question it during an audit.

Just wanted to add another perspective on the calculation method since I see some great advice here already. You're absolutely correct to go with Option 2 - the basis remains at the fixed dollar amount of $6,825. Here's a simple way to think about it: when you paid taxes on that $6,825 during your backdoor Roth conversion, you essentially "bought" that amount as your after-tax basis in traditional IRAs. Market gains and losses don't change what you already paid taxes on - they just affect the overall account value. One thing I'd recommend is calling your 401(k) plan administrator before initiating the rollover to confirm: 1. They accept partial rollovers from IRAs (as others mentioned, some don't) 2. Their process for handling the pre-tax designation 3. Any paperwork they need from you to properly code the incoming funds Also, when you request the rollover from your IRA custodian, be very specific that you're rolling over "$78,175 of pre-tax funds, leaving $6,825 of after-tax basis in the IRA." Some custodians will try to do a proportional distribution if you're not crystal clear about your intent. This reverse rollover strategy will definitely clean up your future backdoor Roth conversions - you'll essentially have a "clean slate" IRA situation going forward!