Roth Conversion & Airline IRA legislation
I have a client with a unique situation. He is an employee of an airline that went throught the bankruptcy process 5 or 6 years ago. Part of the bill that funds the FAA “FAA Modernization and Reform act of 2012” allows employees of airlines that received payments for contract concessions to roll those payments into an IRA and file an amended tax return in the years the payments were received. This will result in a substantial tax savings as these payments pushed a number of airline employees into the 33-35% tax brackets.
This client also has a small IRA funded with after tax dollars.
What I would like to do is have this client do a Roth conversion on the after tax IRA and then fund a new pre-tax IRA via the above legislation.
Unfortunately all this has to be done before the middle of August….will the IRS require that all the IRAs in aggregrate be considered in the conversion even though when the conversion was done there was only one existing IRA? I am trying to limit the tax liability and completely move the after-tax IRA to a Roth.
thanks in advance
Kevin Grady
Permalink Submitted by Alan Spross on Thu, 2012-04-19 21:16
Yes, the amount of airline payments rolled into a TIRA will be included in the total TIRA balance on line 6 of Form 8606, and whatever basis client filed on prior year 8606 forms will then be a lower portion of the total balance on 12/31/2012. Even if the conversion was done now before the new TIRA rollovers were funded, the basis will be diluted because the valuation date for pro rating is 12/31.
Client will get tax refunds from amending the returns for the year of distribution and could use some of that money to pay the conversion taxes, but the bottom line is that he would have been better off converting what he has in 2011 or earlier when more of the basis could have been applied to the conversion as a %.
You did not mention the client rolling any of those payments to a Roth IRA, therefore these payments were apparently kept outside of any IRA and client now wants to retroactively roll them over to a TIRA. You probably have seen the attached, but note the limitation paragraph that may affect just how much client is allowed to roll over now:
http://www.irs.gov/formspubs/article/0,,id=256346,00.html