Co-mingling after-tax and pre-tax monies
While planning to transfer a traditional IRA (all pre-tax) to a R/O IRA created from a 401k I thought was all pre-tax, I discovered that there may be after-tax monies in the R/O IRA. I have the T-IRA transfer on hold for now. What complications do the co-mingled monies mean for my total IRA investments that include other 401ks, T-IRAs, and Roths? Should I cancel the transfer? At 67+, I’m retired and won’t return to work.
Many thanks!
Jeff
Permalink Submitted by Alan Spross on Sun, 2012-09-09 00:21
It won’t make any difference except for possibly limiting creditor protection for your IRAs if you live in a state that does not fully protect IRA accounts. If your state does not provide complete protection, a rollover IRA has unlimited dollar protection under the federal bankruptcy Act of 2005. Contributary IRAs are limited to 1mm plus inflation. So even if you are in a state that does not provide protection, as long as your IRAs will not exceed 1mm, you aren’t giving up anything. Commingling a rollover IRA with other IRA money likely subjects the total protection to the 1mm.
There are no tax related issues from combining these accounts. However, if you can document the amount of after tax money from the employer plan rollover, you need to record it on Form 8606 to prevent double taxation. Be sure to keep the 1099R that indicates a distribution of after tax money just in case your basis in the IRA comes into question. The 8606 does not need to be filed until the next year you otherwise would need an 8606. That would happen when your RMDs begin if you do not take distributions sooner.