After Tax Money in a Qualified acct
Person has a 403-B acct held at their previous employer for the last 5 yrs. He is now 71. He wants to rollover the entire amt to his IRA that is already establised. He is worried about the after tax money that is included in the 403B acct. He was told by the current custodian that they would roll the total amt over to this IRA which is fine so far. His current IRA custodian said they could accept both the pre-tax and after-tax amount, but they couldn’t track going forward when he takes his RMD. They would send him a 1099 showing any distribution taken from the acct (RMD’s because of his age) but wouldnt break down the after tax portion on the 1099. They told him he is responsible for tracking this money. Is this normal and if so, what would be needed to be sent in with the 1099 to the IRS showing that this money also included after tax amounts.
Thanks
Permalink Submitted by Alan Spross on Mon, 2012-12-10 17:06
I assume this after tax balance is NOT Roth 403b funds. If it IS Roth 403b money, please advise because the following will NOT apply. However, the 403b administrator’s comments appear to indicate that this is NOT Roth 403 money.
Once after tax amounts are rolled into a traditional IRA, the taxpayer must track the following pro rated distributions on Form 8606. The taxpayer also reports the amount of after tax funds rolled into the IRA on an 8606 in the next year an 8606 would otherwise be needed. Since taxpayer is taking RMDs, the amount rolled over would be shown on line 2 of Form 8606 for the current year. Therefore, the IRA custodian is correct and they will not report the breakdown on the 1099R, only the gross IRA distribution.
However, if the amount is significant and is NOT Roth 403b money he should request the after tax amount to be paid to him personally and roll it to a Roth IRA. And if it is not significant and he does not have a Roth IRA perhaps he should just keep the after tax amount in a taxable account and avoid pro rating his TIRA RMDs for the rest of his life.
If he wants to roll over the after tax money to a Roth IRA, it is better to have the distribution completed this year to avoid possible IRS guidance coming later that could make this more difficult.
Permalink Submitted by hank suskiewicz on Mon, 2012-12-10 19:07
This is not a Roth. Can the after tax portion be rolled to a Roth as suggested and thus tracking would be much easier and no RMD would be needed.
Permalink Submitted by Alan Spross on Mon, 2012-12-10 20:42
Most likely yes. There are some issues about pro rating which are uncertain because of incomplete IRS guidance. However, taxpayers have been doing these rollovers without a problem for the last 3 years. My reference to more difficulty in the future stems from 2013 being a new year that provides the IRS to complete their guidance to taxpayers and 1099R issuers to require pro rating in certain situation. But it’s too late for that now in 2012, so there is minimal risk in simply rolling the after tax amount to a Roth IRA.
As you said, that would eliminate Form 8606 pro rating on future RMDs from the TIRA, and the Roth IRA would not have RMDs and this money could grow tax free. I think there is little risk in doing this if completed this year.