Ineligible Rollover Inquiry
Hello,
We have had a few examples were a client has a rollover into a Trad IRA and it includes pre-tax and after-tax contributions. For the after-tax contributions our custodian recommends the client keep track of them using form 8606 to track the basis. Would a recharacterization of the after-tax contributions be an option as well?
Thank you.
Permalink Submitted by Alan - IRA critic on Wed, 2025-06-25 17:06
If client does a 60 day rollover of the entire amount, the IRA basis already reported on Form 8606 will not change. This is the same as if a direct transfer was done to a TIRA rather than a 60 day rollover.
If client does a partial rollover and keeps the rest, Form 8606 must be filed to calculate the taxable portion of the amount that is kept. Pre tax amounts and basis are pro rated on Form 8606.
If client converts to a Roth IRA, Form 8606 will calculate how much of the conversion is taxable and will apply some of the basis as the non taxable portion of the conversion.
Recharacterization is not an option, as it is only allowed for regular IRA contributions, not rollovers.
The above pro rate rules applies for IRAs. If the distribution was instead from a 401k and included after tax amounts, the amounts rolled over to an IRA are treated as coming first from the taxable portion of the distribution. The after tax amount can be kept (or rolled to a Roth IRA) tax free.