Do I need to file a 8606 for this? (Direct Transfer from 401-k to Rollover IRA account which included some After-Tax funds)

Submitted by Rob Layman on Tue, 2018-05-01 20:44

In January 2011 I did a direct transfer from my former employer’s 401-k plan to my newly created Rollover IRA account at TDAmeritrade (it’s a traditional IRA account not a Roth).
The total transfer was $530,000 and $110,000 of that was AFTER-TAX money I had contributed into my 401-k over the years.
I was issued a 1099-R later that year which correctly shows it as non-taxable event (and even shows the $110,000 in box 5 “Employee Contributions”, etc.)
I included the total $530,000 on line 16b of my 1040 that year and paid no taxes on any of it.
My questions is this:
Now that the funds (before tax and after-tax) are co-mingled in my Traditional Rollover IRA, I need to establish my Basis with the IRS before I start taking distributions so I won’t have to pay tax on the $110,000 portion.
WAS I SUPPOSED TO HAVE FILED A 8606 Form along with my 2011 taxes to do this? If so, what can I do about it now? If not – when or how do I establish my basis in the future?



Submitted by Alan - IRA critic on Tue, 2018-05-01 21:48

  • I think you meant that you reported the 530k on line 16a, not 16b since 16b is taxable. In any event, the instructions for line 2 of Form 8606 indicate that if you rolled over non taxable amounts from a qualified plan in some earlier year, you should show this amount on line 2 of Form 8606 in the first year that you take a distribution from any non Roth IRA account. Therefore, you do not need to to anything now, but make a note to yourself to include the 110k on line 2 of the 8606 in the first year you take a distribution. And continue to retain that 1099R from the plan that shows this amount in Box 5, just in case there is ever a question from the IRS.
  • In retrospect, while there was no clear guidance from the IRS until Sept, 2014, you could have done a split rollover in 2011 with the 110k going to your Roth IRA and the rest to your rollover TIRA. There were various ways to do that despite a debate regarding the IRS intent at the time. As it turned out the people who gambled and split their rollover were vindicated in 2014 when Notice 2014-54 was issued to clarify that a split rollover was OK if both distributions were requested at the same time. Unfortuneately, you are now subject to the Form 8606  “cream in the coffee” rule for life UNLESS you are still working and can roll the pre tax balance of your IRA into an accepting employer plan. You could then convert the 100k (and any other IRA basis you have) to a Roth tax free, and eliminate future 8606 filings. This is worth the effort if you have the opportunity.

Submitted by Rob Layman on Tue, 2018-05-01 22:16

yes, it was reported on 16a (Line 16b shows “ROLLOVER”)I read the 8606 instructions for Line 2 which simply state:

  • You rolled over any nontaxable portion of your qualified retirement plan to a traditional or SEP IRA that wasn’t previously reported on Form 8606, line 2. Include the nontaxable portion on line 2.  unfortunately, I can find nothing about WHEN one is required to do this (at the time of the rollover??  or upon initial distribution??   typical IRS vaguery.       Thank you for your clarification – and BOY, do I wish I had the nerve to have split them back then.   I spent countless hours on the phone with several CPA’s etc. all of whom couldn’t commit one way or the other and suggest extreme caution given the lack of IRS guidance at the time.   Again THANKYOU for the answer – I hope you can answer my next question as definitely (I don’t think there’s ANY IRS guidance on this one either) 

Submitted by Alan - IRA critic on Tue, 2018-05-01 22:31

The following is copied from p 15 of IRS Pub 590 A:

A Form 8606 isn’t used for the year that you make a rollover from a qualified retirement plan to a traditional IRA and the rollover includes nontaxable amounts. In those situations, a Form 8606 is completed for the year you take a distribution from that IRA. See Form 8606 under Distributions Fully or Partly Taxable in Pub. 590-B.

Submitted by Rob Layman on Tue, 2018-05-01 22:37

many many thanks again sir!!   (why oh why can’t they put all of this stuff in 1 location? – or at least repeat it in multiple locations iinstead of dribbling out bits and pieces here/there/whoknowswhere…..like trying to track a marble in a pachinko machine!!

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