Rollovers of After-Tax Contributions in Retirement Plans

Submitted by peter hsi on Wed, 2018-06-20 18:41

Hi,
I have a traditional IRA account that is funded by after tax contributions. Currently, 60% of the balance are from past after tax contributions (i.e. my basis) and 40% of the balance are from accumulated earning over time. In addition to this after tax IRA, i have a 401K and company profit sharing plan. I saw the below from IRS site. It seems to suggest that i can rollover 60% of the balance to a Roth IRA without paying any income tax. If so, how do i report this on Form 8606 (line 6 and 8 for the prorata basis)? Thanks
Peter
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Can I roll over my after-tax contributions to a Roth IRA and the earnings on my after-tax contributions to a traditional IRA?

Yes. Earnings associated with after-tax contributions are pretax amounts in your account. Thus, after-tax contributions can be rolled over to a Roth IRA without also including earnings. Under Notice 2014-54, you may roll over pretax amounts in a distribution to a traditional IRA and, in that case, the amounts will not be included in income until distributed from the IRA.
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Notice 2014-54
The commenters also pointed out that even under the allocation method described in Notice 2009-68 a participant who wishes to disburse after-tax amounts to one destination and pretax amounts to another could accomplish this result in a series of steps. First, the participant could take an eligible rollover distribution as a single cash distribution. Second, by taking advantage of the rule in §402(c)(2) that distribution amounts that are rolled over are treated as consisting first of pretax amounts, the participant could roll over the pretax amounts included in the distribution to one destination, such as a traditional IRA. The remaining amount of the distribution would be after-tax, which the participant could either roll over into a Roth IRA or retain without incurring any tax liability. The option to roll over all after-tax amounts into a Roth IRA, however, would
only be available to taxpayers with sufficient funds available outside of the plan to be able to roll over the entire amount distributed, including the 20 percent of the taxable portion of the distribution paid to the IRS as withholding pursuant to §3405(c)
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Permalink Submitted by Alan - IRA critic on Wed, 2018-06-20 19:08

Notice 2014-54 only applies to rollovers from qualified plans to Roth IRAs, not to TIRA to Roth IRA rollovers. If your basis was in your 401k, then you could do a Notice 2014-54 split rollover, and these rollovers would not generate a Form 8606.
In your situation where your basis is already in your TIRA, there is only one way to isolate it. You would need to have an active 401k that accepts rollovers of pre tax amounts from your IRA. You could then roll your pre tax IRA balance into the 401k and then convert the remaining IRA basis to a Roth tax free. In the year after the conversion you could roll the pre tax IRA money you rolled to your 401k back into your IRA if the plan permits.
Again, the benefit of Notice 2014-54 is that the after tax money never gets into your TIRA where it becomes subject to the pro rating of Form 8606 for all subsequent TIRA distributions.