After Tax Money in a Qualified Plan
I would like to ask a question re: a client with after tax money and pretax money in a qualified plan. I have read your article and others and plan on taking the after tax money to his ONLY IRA so only after tax money in the account and AGI will allow conversion to Roth. I will then in the same year take his pretax to IRA and leave there. In doing, this all after tax money is rolled to IRA then Roth but in same year I will have an IRA with pre tax money. Do I have an issue with having an IRA in same year or does the after tax roll occurring prior to actually having an IRA with pre tax allow for tax free conversion to Roth?
I understand the pro rate rules completely but want to make sure they do or don’t apply in my situation b/c of steps of two conversions even in same year.
Permalink Submitted by Alan Spross on Thu, 2008-03-27 03:07
There are actually two problems here that mostly eliminate this strategy.
1) The plan itself cannot distribute after tax amounts separately from pre tax amounts UNLESS the plan contains separately accounted for pre 1987 after tax contributions, and then the plan may distribute ONLY those after tax contributions separately. All later after tax contributions must come up pro rated with pre tax amounts in the plan.
2) If there is year end balance in any traditional, SEP or SIMPLE IRA account, then any conversion done earlier in the year will be subject to the pro rated calculation of the taxable amount on Form 8606.
Therefore, you are limited to determining if there are any pre 1987 after tax contributions in the plan, distributing them first and rolling them into a TIRA and then converting prior to year end. The 8606 will then be used to both report the after tax contribution to the IRA and the conversion of that IRA.
Also, new this year is the opportunity to directly convert amounts from a QRP to a Roth IRA without going through a TIRA. But the IRS Regs are not yet fully released on this and the plan may not yet know if they will offer this transfer. But if they do, those pre 1987 contributions could go straight to a Roth without tax, and the other balance could be transferred to a TIRA. However, the plan may also not offer more than one transfer destination.
Remember to check out any NUA potential if client has any highly appreciated employer shares in the plan, since one these assets reach an IRA of any type, NUA is forfeited.