Isolate After-Tax Contributions in IRA
Hello-
Client has a $100K IRA ($20K of it is After-Tax). We are trying to roll just the pre-tax into their retirement account (401k or 403b) and then convert their after-tax remaining balance to the Roth.
1. We would roll the deductible contributions, earnings on the deductible contributions, AND earnings on after-tax contributions to the 401k/403b correct? Therefore, it would only be after-tax contributions remaining in the account?
2. Do we have to wait until the pre-tax money has been deposited to the 401k/403b to do the conversion of the after-tax?
3. Are there any special provisions the 401k/403b can or cannot have to isolate the IRA basis this way? For example, if after-tax contributions are allowed to be made to the 401k can you still separate out the pre-tax from the basis in this way?
Thank you!
Permalink Submitted by Alan - IRA critic on Wed, 2021-11-17 23:48
Yes, the amount of IRA basis per Form 8606 plus current year ND contributions should be retained in the IRA. An employer plan is not allowed to accept the rollover of IRA basis.
You do not have to, but if something goes wrong with the pre tax rollover for any reason, you would be left with a mostly taxable conversion. Therefore, it is safer to wait until the rollover has been deposited before doing the conversion.
See above. The 401k cannot accept IRA basis, and some plans will not accept any IRA rollovers. Others will accept IRA rollovers, but only from rollover IRA accounts that were funded exclusively from past employer plan rollovers.
Pending legislation in Congress eliminate this ability to isolate IRA basis starting in 2022, by not allowing the conversion of IRA basis. All conversions would then become 100% taxable.