Rolling over after tax contributions into a Roth

Submitted by William Hammond on Thu, 2017-12-21 21:00

Client 8606 shows basis of $63K and value of IRA/profit sharing plan of $2.5M. Client will take RMD for next 2 years of $250K per year to take advantage of $750K charitable contribution.
Does it make sense for him to rollover his after tax dollars ($63K) into a Roth so that all future RMD’s will be 100% taxable?
Thank you and MerryChristmas to all!
BH



Submitted by Alan - IRA critic on Thu, 2017-12-21 21:46

  • Bill, since the 63k is already in an IRA account, it cannot be converted to a Roth IRA by itself. Pro rating would apply and therefore any conversion just like any RMD distribution must be reported using Form 8606. Roughly 2.5% of any distribution would be non taxable and 97.5% taxable.
  • Now I’m not sure what you meant by” IRA/Profit sharing plan”. If this money was in an employer plan, then Form 8606 would not apply and the after tax contributions could be separated and directly rolled into a Roth IRA per Notice 2014-54 (after the annual RMD was completed). Therefore, please clarify which funds are in an IRA account, and which funds are in a separate profit sharing account. An IRA is not a profit sharing plan.
  • Pending your answer, it is always beneficial to move retirement plan after tax dollars into a Roth IRA if it can be done without current taxes. But once after tax dollars are already in a TIRA account, the only way to do this is to roll the entire pre tax TIRA value into an accepting employer plan, then convert the TIRA basis tax free.If client is retired though, very few employer plans will accept an IRA rollover.

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