Belated Withdrawal of After-Tax Contributions to Fund a Roth
In 2007 I rolled over the total amount of my 401k from an employer plan to a Vanguard IRA. The total amount of the rollover included pretax and after-tax contributions. My intention was to convert the after-tax amount to a Roth IRA in 2010 when I would be required to start taking mandatory distributions. Now it’s 2010, and I’m looking at the rules, and it’s not apparent how I can withdraw the after-tax contributions as a separate amount to be converted into a Roth IRA. It looks like the rules dealing with prorating apply. Any alternatives?
Permalink Submitted by Alan Spross on Wed, 2010-04-21 03:44
Once the after tax funds are in an IRA, the pro rate rules must apply to any distributions or conversions from your traditional IRAs. When you make your first distribution from the IRA, be sure to file Form 8606 to report the added after tax basis to your IRA. That form will eliminate double taxation of your funds.
There is ONE possible alternative. If you are currently employed and your plan will accept rollovers from your IRA, you could roll the pre tax amount only back to an employer plan, leaving only the after tax amount behind, ie the same figure that will show on your 8606 form. You can then convert that remaining amount right away tax free. That is the only way to circumvent the pro rate rules.
Permalink Submitted by John Bozeman on Thu, 2010-04-22 02:46
Thank you. I made the after-tax contributions over a 14-year period. I have a brokerage record for the total amount of after-tax contributions but not for the year-by-year amounts that make up the total. I’ve never filed an 8606. Under these circumstances, will I be correct in using that total after-tax number for the first time on Line 2 of an 8606 for Tax Year 2010? My number for Line 1 would be 0. The instructions are not as clear as I wish for simply entering the total amount of after-tax contributions on Line 2.
Permalink Submitted by Alan Spross on Thu, 2010-04-22 03:38
Note that the line 2 instructions refer you to a prior 8606 to pick up the cumulative figure, but you did not file them. The brokerage record will show your IRA contributions, but will not indicate whether they were deducted or not and apparently not the year, so they are not much help. For that, you will probably have to order trancripts from the IRS including Form 5498 that reported IRA contributions for 14 years. When you match up your tax returns with the 5498 info, and see that you made a contribution but did NOT deduct it, then you need to file an 8606 for that particular year. The IRS has been accepting retroactive 8606 forms without penalty, and you need to document each year’s non deductible contributions. You cannot just enter a makeup total on line 2 without a prior 8606 to indicate the year of the contributions. Start with the oldest year and work forward, since the basis amount is cumulative.
After tax rollovers from a 401k are different. For some reason, the IRS now advises NOT to file an 8606 for these amounts UNTIL you take your first distribution, so for these you can just add them to line 2 on the 8606 that reports your 2010 conversion. The 2007 1099R from your 401k plan will provide the amount of after tax contributions. Obviously, this job would be easier if the procedures were reversed.
You can still convert before you do this research, and if you defer the 2010 conversion income to 2011 and 2012, you will have more time to get it done. Even though you do not report the income until 2011 and 2012, the taxable % will probably be determined on a 2010 8606, so to avoid amending that, you probably have about 9 months to get the 8606 forms filed. Send them to your present IRS filing office together with an explanation.