After-Tax Roth conversions
I know there is a pro-rata rule if the Roth conversion is part pre-tax and part after-tax dollars but would there be a tax of only the after-tax portion is converted?
I know there is a pro-rata rule if the Roth conversion is part pre-tax and part after-tax dollars but would there be a tax of only the after-tax portion is converted?
Permalink Submitted by Anonymous (not verified) on Tue, 2009-06-30 14:44
Unfortunately, you can not choose only to convert the after-tax. If pre-tax exists, it is part of the “pot” so to say. Tax Form 8606 is going to force you into this pro-rata calculation.
I can only think of the following way to come close to what you are trying to achieve. If your current employer allowes you to rollover IRA assets into their 401K plan, you could roll all the pre-tax money. This is allowed under the new portability rules. Then wait until the following tax year and virtually be left only with after-tax funds (unless some small earnings/growth on the money occurred). And then convert. I don’t even know, if this has been attempted yet…..
pmk
Permalink Submitted by Alan Spross on Tue, 2009-06-30 16:00
This strategy has been recommended in the financial press for quite awhile now, so I am sure that it has been executed in a few cases. The main problem is convincing an employer plan to accept IRA rollovers, particularly from an IRA that is not a rollover IRA. The qualified plan cannot accept after tax amounts, and if they were to acquire after tax amounts, an expensive corrective action is required to avoid plan disqualification. I tried to do this about 3 years ago with my wife’s TIRA account and Fidelity would not accept any of it at the time. I offered to provide them all of her 8606 forms over the years, but their rule was not negotiable.
However, things might be different now, but a rollover IRA that has not received regular contributions has a much better chance of acceptance by the qualified plan. If they do accept the rollover, there is no need to wait to do the conversion because the line 6 Inst for Form 8606 indicate that employer rollovers are not to be included. Since these cannot be pro rated and no after tax amounts are allowed, ignoring these rollovers leaves either a reduced TIRA balance or in an ideal case, JUST the non deductible contributions. These can then be converted tax free if you do it quickly before more earnings accumulate.