Roth Conversion if TIRA and After Tax IRA Kept Separate?
I have a client who rolled over a company plan years ago. At that time she had pre tax AND after tax contributions. She set up 2 different IRA’s and dissected the pre tax and after tax — and rolled them separately into each IRA. The funds have never been co-mingled and she has never taken distributions. Thus has never filed 8606.
The after tax IRA now has a gain above basis of $1,900.
Question– Can she now take the after tax IRA ONLY and do a Roth conversion? If so, she would pay conversion tax only on the $1,900 and file form 8606 to show the taxable ratio for this IRA only.
Unfortunately, I don’t think she can do this. I believe ALL IRA’s (separate or not) will be treated as one.
If so, is there anyway she will EVER be able to separate the after tax portion from the pre tax portion going forward and eliminate form 8606 in the future?
Thanks for the help!
Permalink Submitted by Alan Spross on Sat, 2008-12-06 18:27
Starting in 2002, after tax contributions to a qualified plan were allowed to be rolled over to an IRA account. However, Form 8606 must be filed to report the added basis in the IRA. If this was not done, it needs to be done retroactively ASAP. It is best to download the edition of the 8606 used in the year of the rollover if possible.
It does not matter whether a separate IRA was set up for these funds or not, since all traditional IRAs are combined as one for tax purposes, as you suspected. If she does a Roth conversion, no matter which IRA funds it, the tax free portion will be the same, but the retroactive 8606 needs to be filed before the conversion is reported so that the conversion will not turn out to be fully taxable.
Example: Basis of after tax rollover plus any non deductible contributions = 10,000. Year end value of all traditional, SEP and SIMPLE IRAs including the converted amount = 100,000. Then 10% of the conversion would be tax free, and this is also developed using Form 8606, Parts I and II in reporting the conversion.
There are only two ways to eliminate form 8606 on future distributions:
1) Convert the entire balance of her TIRAs, spread out to offset higher tax rates.
2) If she is working and her current plan will accept incoming IRA rollovers, she might be able to roll the entire pre tax balance to the employer plan. That will leave the after tax balance, which can then be converted tax free. Even if the plan would only accept the pre tax rollover IRA, it would be close enough to accomplish this, since there is only 1900 of gain in the other IRA, which would be taxable upon conversion.