401K ROLLOVER
A prospect had a 401k acct with before tax dollars and after tax dollars in the acct. In 2003 he retired and moved the acct to an IRA. One IRA for each type of money, before and after tax money. He then wanted to convert the after tax funds to a Roth. ( he had already paid taxes on these funds) He did and this created a !099 for the acct. Realizing the mistake he was able to get reclassified to an IRA and eliminate the 1099.
Question:
Should he not be able to convert this to a Roth without taxes conquences, except maybe on the actual gains?
Permalink Submitted by Alan Spross on Sat, 2007-10-13 00:19
Right, he cannot simply convert one of many IRA accounts and apply only the basis for that one IRA. All of his IRAs must be totalled up and considered as one. The effect here is that no matter which IRA he uses to fund the conversion, the tax effect will be the same. However, since he was evidently taxed on a higher % of the conversion than he expected, he apparently was able to recharacterize that conversion and wipe out the tax bill for it.
At this point he should be sure that he filed Form 8606 in 2003 to report that he rolled over after tax amounts to his TIRA. This needs to be done to prevent the after tax amount from being taxed a second time. The IRS has been accepting these forms without assessing a penalty, but if this has not been done, it should be done ASAP. He will then need an 8606 to report any distributions or conversions from here on, as the 8606 is used to calculate the amount that is taxable per explanation in paragraph #1 above.