Distributions Prior To Notice 2014-54
New client has 2 IRAs from taking a distribution from his 401k in 2012; while still working.
– After tax dollars went into IRA #1.
– Pre tax dollars went into IRA #2.
His broker at the time orchestrated the arrangement.
My interpretation of the transition rules regarding transactions prior to September 18, 2014, as taken from the Notice 2014-54:
“taxpayers may generally apply the same reasonable interpretation standard described in the preceding paragraph” — which I take to mean, allocating the after tax dollars to one specific IRA is “OK” ??
Permalink Submitted by Alan - IRA critic on Tue, 2018-08-28 02:51
Yes, many taxpayers were using one of the methods to isolate their basis well before 2014-54, and some IRA custodians were cooperating. However, it appears that your client took the conservative approach and rolled 401k basis into a TIRA, not a Roth IRA. Since all TIRA accounts are treated as a single account with respect to basis, client is in the same position as if he rolled the total into the same IRA account. That did not separate his basis because you can’t if it goes into a TIRA. Therefore, client might just as well combine these two IRA accounts if he wants to. His IRA basis is increased by the amount of the after tax rollover and IRS Form 8606 Inst indicate that the next time he would otherwise file Form 8606, he should add that basis to line 2 of the 8606. All TIRA distributions will then be pro rated on Form 8606. There is only one possible solution. If he is still working for a plan that has a qualified plan that will accept IRA rollovers, he could roll the pre tax total of his IRA into the plan, then convert the amount of basis still in his TIRA to a Roth tax free.
Permalink Submitted by Brian Devers on Tue, 2018-08-28 12:43
Exactly what we were thinking.Thanks much.