co-mingled non-dedutible funds inside of Traditional IRA
I am working with a 69 year old divorced woman who received a portion of her ex-husband’s Deferred Profit-Sharing Plan back in 2002.
The broker transferred the entire amount ($663,963)into an IRA that now contains an after-tax contribution ($55,554)as well as pre-tax contribution. In 2011 and 2012 she took out a distribution from the IRA and her accountant completed Form 8606 Nondeductible IRAs which calculated the amount of the distribution that was not taxable.
My client would like to simplify her tax situation with regard to filing her taxes and keeping track of pre and after-tax contributions.
She is only taking funds out on a “as needed basis”. Looking forward to when she turns 70.5 in 2014 I am working my way through the process of whether or not it makes sense for her to: (a) transfer the non-deductible funds into a separate non-deductible IRA, (b) convert the non-deductible IRA funds into a ROTH IRA or (c) can she go back and amend her 2011 tax return and show the distribution of $48,933 as a distribution of her after-tax portion within the IRA and amend her 2012 tax return to pick-up the remaining after-tax contribution.
We are open to other strategies that will benefit the client as well.
Permalink Submitted by Alan - IRA critic on Thu, 2013-05-16 20:12
Neither a,b or c is possible once after tax contributions are made to an IRA. About the only way to isolate the IRA basis is for her to get a job with a company that offers a 401k or similar plan that will accept IRA rollovers, and roll the pre tax amount of her IRA into that plan. That would leave the after tax basis in her IRA and she could then convert it to a Roth IRA tax free. After the year of the conversion she could roll the 401k funds back to an IRA and her IRA would then be fully pre tax. Or she could convert the entire IRA to a Roth IRA, which probably makes no sense for her. Otherwise as is the case if she is permanently retired, she is stuck with the pro rate formula of Form 8606 as long as she has an IRA under which all her distributions will be partially tax free. The tax free % will remain fairly constant througout barring large gains or losses in her IRA. Having this situation is not all that bad since tax software can handle the 8606 very easily with the line 14 amount from prior year 8606 moving to line 2 of the current year 8606 to determine the taxable %.
Permalink Submitted by Lee Benson on Thu, 2013-05-16 23:36
You are absolutely right; she has no desire to go back to work. Full retirement for her.I spoke with the retirement section at a popular MFD company and they stated that the client could open a non-deductible IRA with them and transfer the funds into a new account. Based on your comments above, I take it that option does not exist. Other than what you have described above, there is no option for segregating the pre and after-tax funds.
Permalink Submitted by Alan - IRA critic on Fri, 2013-05-17 00:02
Correct. She could open a new account and transfer the non deductible balance into it, but it would do no good since all her IRAs are added together in the calculation performed on Form 8606.