Non-Deductible IRA
Husband & Wife – Husband owns a Variable Annuity – registered as IRA $185k, IRA Rollover $500k, Non-Deductible IRA $47k ($39k basis). Wife has traditional IRA $105k and Non-Deductible IRA – $38k ($28k basis).
Client’s accountant is stating that non-deductible contributions ($39k and $28k respectively) can be re-characterized as a ROTH and the earnings in those accounts rolled into their traditional IRAs.
I had always been under the impression the IRS would look at all IRA accounts combined and the conversion on the non-deductible contribution would be taxed pro-rata.
I’d appreciate your feedback.
Thank you!
Permalink Submitted by Alan - IRA critic on Wed, 2021-04-07 17:01
Probably some misunderstanding between client and accountant. You are correct that all non Roth IRAs are treated as one combined account, so any conversion (not recharacterization) done will be taxable according to calculations on Form 8606. Any basis does not attach to a particular account, so it does not matter which account receives a non deductible contribution or which account funds the conversion. The result is the same. However, each spouse’s basis is totally separate from basis of the other spouse, and each spouse would have a separate 8606.
Now either of these spouses that participate in an employer plan that accepts rollovers from IRAs could roll the pre tax total of their IRAs into that plan, and then convert the remaining basis to Roth tax free. IRA rollovers to qualified plans always transfer the pre tax IRA amount first, and qualified plans cannot accept IRA basis anyway. Therefore IRA to QRP rollovers do NOT pro rate IRA basis.