Other Tax Questions
Questions and comments on other topics covered in Fairmark.com, such as UTMA accounts, and any tax questions that don't fit our other categories.
Personal IRA after-tax contributions - conversion to Roth IRA
Posted by: joel, October 2, 2017 11:18PM
Situation:
I have two personal IRA's at two different brokerages. One was initially setup as a personal IRA and was funded for several years via after-tax contributions (8606ís were filed as required). Several employer 401-k(s) were rolled into this account over the years. The second personal IRA was setup to handle an additional employer 401-k roll-over. The first personal IRA also includes some after-tax contributions originally made via employer 401-k. When this roll-over (401-k to personal IRA) was executed, administrator cut two separates check (tax-deferred, after-tax) to brokerage managing personal IRA.

Goal:
I took first required RMD this year and would like to "isolate/remove" all after-tax contributions from IRA's ideally by rolling this amount (tax-free) to an existing Roth IRA. This would eliminate any need to "pro-rate" taxable/ nontaxable amounts of RMD, reduce future required RMD's, and allow all future earnings on these funds to grow tax-free.

Can this be done? If so, how?
I have done some research and I am stymied by "terminology". I believe IRS supports (Notice 2014-54) a process to remove after-tax contributions from an existing 401-k but does not address IRAs. Apparently, IRS quite clear on 401-k "after-tax" but when addressing IRA uses "non-deductible" (not "after-tax") when addressing after-tax contributions. I no longer have
an employer 401-k to "accept" any after-tax monies from these two personal IRAs.

Any help would be appreciated.

Re: Personal IRA after-tax contributions - conversion to Roth IRA
Posted by: Alan S., October 3, 2017 01:48AM
Unfortunately, once after tax funds are contributed to a TIRA account, all distributions from any of your TIRA accounts include a pro rated amount of after tax and pre tax money. The pro rate factor is calculated by Form 8606. Notice 2014-54 does not apply to distributions from an IRA, only from a qualified plan.

There are a few exceptions to the pro rate calculations for IRA distributions (including QCDs, one time transfer to HSA), but only one that is unlimited in amount. That exception is rolling your IRA pre tax dollars without including after tax money into an accepting employer plan. Employer plans that accept these rollovers are usually that of your current employer, so if you are retired it will likely not be possible to roll your IRA pre tax money into a qualified plan leaving your after tax amount behind in the IRA to convert tax free. You are therefore likely stuck with these pro rate rules for life, which requires filing an 8606 every year in order to have some portion of your RMD as non taxable.

You indicated that you did roll some after tax 401k money into your TIRA. You can claim that basis by reporting it in line 2 of Form 8606 on the first 8606 you file after the rollover. That could be years later and would increase your IRA "basis" by adding the after tax 401k money to the total of non deductible IRA contributions you made for which you did file Form 8606.

While people do not like having a partial non taxable amount in their IRA for life, tax software handles this easily and produces the current 8606 that also shows on line 14 the remaining IRA basis to carry over to the following year.

Re: Personal IRA after-tax contributions - conversion to Roth IRA
Posted by: joel, October 4, 2017 01:35AM
Alan S.

Even though I somehow posted this to the "wrong" forum (was trying to post to retirement savings and benefits) I was hoping specifically for your review / reply.

Thank you.

Just to clarify via example:
Assuming total in both IRAs is 200k with 10 percent (20k) after tax.
Assuming required RMD is 10k.
Assuming I also do a 25k partial roll-over from IRA to Roth IRA.

RMD taxable amount is 9k; roll-over taxable amount is 22.5k (both 90% taxable).

Result is for 2018:
IRA balance (200-10-25) 165k; remaining after-tax balance (20k-1k-2.5k) is 16.5k; again 10% of IRA balance.

Is this a correct "analysis" ?.

Re: Personal IRA after-tax contributions - conversion to Roth IRA
Posted by: Alan S., October 5, 2017 03:20AM
Yes, your math is correct.
If there are no investment gains or losses in a TIRA, the % of basis in the IRA remains the same year to year.



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