How is RMD calculated -IRAs has after-tax contributions inc. in pre-tax total

Submitted by Diane Connolly on Mon, 2016-03-21 23:29

401K rolled over to Traditional IRA. 401K contained after-tax contributions. When 401K rolled over into IRA company receiving proceeds did not separate after tax contributions but rolled entire amount into pre-tax total.
I’m 70 1/2 and need to take RMD…..Don’t want to pay tax twice on after tax contributions. IRS states that after tax contributions cannot be withdrawn now that they have been rolled over together with pre-tax. Brokerage company refused to separate the funds because they requested 1 check from pension plan and it was too late. Pension company did issue 1099R and placed the after tax amt in box 5 as after tax contributions. Coded the entire 401k as roll over. Brokerage company wrote letter of apology and accepted resp for error. Understand that this is a nightmare…….IRS claims that the after-tax monies must be prorated in the calculation AFTER the RMD is pulled from banking institution. I believe it should be calculated considering the after-tax contribution otherwise the incorrect amount might be pulled from IRA and result in penalties. Several accountants cannot fund a way to get credit for after tax contributions and somehow deducted or calculated in the basis amount on IRS form 8606.

Can anyone help?????



Submitted by Alan - IRA critic on Tue, 2016-03-22 02:18

For your first TIRA distribution after the rollover, whether RMD or not, Form 8606 should be added to the tax return to report the basis in the 401k shown in Box 5 on line 2 of the 8606. That basis will be added to any prior IRA basis and the TIRA distribution will be pro rated on that same 8606 to determine the taxable portion of the distribution. Note that this has no effect on the amount of the RMD, it just makes a portion of it non taxable. What is unfortunate is that you were not able to have the after tax 401k money rolled to a Roth IRA where it would not become subject to RMDs and would generate tax free earnings. Be sure to keep that 1099R indefinitely as it show what your 401 basis was.

Submitted by Diane Connolly on Sat, 2016-03-26 01:05

401k rolled over to traditional ira in 2014.  Brokerage Company did not request two separate checks which would hae allowed after-tax contributions to be rolled over to Roth and he pre-tax contributions rolled over into Traditional IRA.  Unfortunately, after tax cannot be withdrawn.  Must factor after tax contributions on 8606 – putting the $$$ on line 2 ,3 and totalling on line 5.  Then it is factored into the basis…..Trying to make sure that what actually occurrs in the after tax contributions is pro-rated into basis and reduced my tax libility each year. I understand that RMD will be the same amount and when calculated the after-tax contributions  is NOT factored into RMD…..does anyone know if this is correct? Can anyone help? Also I turned 70 in December 2015.  Want to take first RMD this year- don’t want to take 2 RMD’s next year because of tax liability.  Can I take RMD this year and then again next year.Told that factor is 26.5 taking RMD this year – Bank claims 27.4.  Anyone know which is the correct factor?

Submitted by Alan - IRA critic on Sat, 2016-03-26 01:38

  • Both the after tax amounts and the pre tax amounts distributed in an RMD year are applied to the RMD, so calculation of the RMD is not affected at all and the dollar amount of the RMD is calculated in the usual manner using the entire balance of the IRA at the end of the prior year.  What does change is that the taxable portion of the RMD is less than 100%, so every year there will be a Form 8606 attached to the return that will calculate the taxable and non taxable amounts of the RMD, and also show on line 14 the remaining amount of IRA basis carried to the following year.
  • Your 2016 RMD is calculated by dividing the 12/31/2015 balance of all your non Roth IRAs by 26.5. You can take it this year or you can defer it to as late as 4/1/2017. Your 2017 RMD is calculated using your 12/31/2016 balance and dividing by 25.6 and must be taken by 12/31/2017.
  • There is no way your first divisor can be 27.4. The divisor is determined by your age at the end of the RMD year. At the end of 2016 you will be 71, so your divisor comes from Table III for age 71 and is 26.5. 27.4 would be the first year RMD divisor for those who have birthdays in the first half of the year (Jan-June). The half year (70.5) determines when your first RMD year is, but the actual age at the end of the year determines the divisor.
  • The above is based on what you indicated as your age. Your actual birthday being in December, and 70.5 coming the following June. Sounds like the bank is getting these two issues confused.

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