New Client has a rollover IRA. Hs been adding non-deductible contributions.
Has 8606 documentation. Also has a Roth account. Wants to place his non-deductible contributions in his Roth account. His accountant does not know how to do it.
Can someone please recommend the IRS procedure. He intends to retire soon and wants to rollover his 401k but does not want the 8606 to deal with every year.
Thank you in advance.
Thank you for your reply. I took your reply to two Tax preparers. Both said the answer was confusing. Perhaps you could simplify, By addressing the answer in steps. i.e. Step one, step two.One other stated since the 8606 documents the basis by %. Could the client just take the after tax % out of the Rollover to the Roth account and leave the taxable % in the rollover. That would mean the rollover has a 100% taxable money. Thank you for you assistance.
Here is a paragraph from p 21 of IRS Pub 590 A describing the special rule noted above:
Tax treatment of a rollover from a traditional IRA to an eligible retirement plan other than an IRA. Ordinarily, when you have basis in your IRAs, any distribution is considered to include both nontaxable and taxable amounts. Without a special rule, the nontaxable portion of such a distribution could not be rolled over. However, a special rule treats a distribution you roll over into an eligible retirement plan as including only otherwise taxable amounts if the amount you either leave in your IRAs or do not roll over is at least equal to your basis. The effect of this special rule is to make the amount in your traditional IRAs that you can roll over to an eligible retirement plan as large as possible.
Appreciate the detailed info. Question. Roth conversion of TIRA Basis was rec’d and credited in Dec 2023 but direct rollover of pre-tax to 401(k) mailed in 2023 but not credited until early Jan 2024. Problem? Thanks.
Not a problem if you received a 1099R for either a distribution or a G coded 1099R for a direct rollover since the 1099R shows that the funds were out of the IRA by year end. Further, the fact that the funds were not yet deposited into the 401k does not matter as the 8606 Instructions state that distributed IRA funds that are rolled to a qualified plan (401k) are not outstanding rollovers that must be shown on Form 8606, line 6.
Thanks so much Alan. I always find your comments to be the best as you always explain the basis for your position.
Permalink Submitted by Alan - IRA critic on Thu, 2017-07-27 20:44
First, if he has been making regular contributions to the rollover IRA, it is no longer a rollover IRA. He also now has basis in his TIRA and any Roth conversion will pro rate the basis with the pre tax IRA money. The only way the client can convert the non deductible contribution amount per Form 8606 without also converting pre tax money is to roll the pre tax balance of the IRA into an accepting employer plan. That will leave only his basis in the IRA and he can convert that tax free. He would probably need to roll the pre tax IRA money into the 401k before retiring, if the plan even accepts IRA rollovers. Once he rolls the 401k into an IRA, the amount of IRA basis % will be lowered and any conversion would have an even higher taxable %. The course of action should therefore be to determine if his 401k will accept the rollover of IRA pre tax dollars from an IRA that is NOT a rollover IRA, and if so complete that rollover, then convert his IRA basis to Roth. Finally, the 401k rollover to an IRA must be deferred until 2018 because rollover of that money to an IRA will undo the benefit of the IRA to 401k rollover. That said, if all this does not come together, he will be stuck with the 8606 for life, but with current tax programs, this is not much of a problem.