Why have a 100% after-tax TIRA?
I’m going to be meeting with a potential new client soon to roll-over some 401k funds. However, in an email he said he has a traditional IRA with 100% after-tax money of 100k. He is a corporate accountant/CPA so I assume he knows what he’s talking about. I haven’t seen this before, why would someone have 100% after-tax money in a TIRA? Why wouldn’t his previous advisor converted that to a Roth IRA? Am I missing something?
Permalink Submitted by Jose Morales on Wed, 2011-03-09 21:20
It is hard to imagine how the account could accumulate $100K of all after tax contributions without one dollar of earnings… That being said, a conversion may not have been an option before because of the client’s MAGI. Starting in 2010 the $100,000 MAGI cap was lifted. It wouldn’t hurt to ask if you can see the 8606 forms that the client has filed for these after tax contributions.
Permalink Submitted by Jim Wolstenholm on Wed, 2011-03-09 21:36
I assume the purpose for looking at his 8606 forms would be to determine what his contributions and determine his cost-basis.
Permalink Submitted by Alan Spross on Wed, 2011-03-09 22:16
Right. If you made the max non deductible contribution every year since 1987, you would still be short of 100k. However, he might have rolled after tax QRP money into the IRA since 2002. He might also have other IRA accounts which cannot be separated in determining % of basis.
Therefore, something is amiss here. See if he owns any other IRAs and what the 8606 indicates. If he does, the pro rate rules apply to conversions over all the accounts and therefore it would not be a tax free conversion.
But as a hypothetical question, if the described situation WAS the total picture with no other TIRAs, conversion would be a no brainer. AND if that were the case, you could not do the 401k rollover before year end 2011 or you would turn that conversion into a partly or mostly taxable conversion.