After-Tax 401(k) Rollover Clean Up
New client has worked with a large retail brokerage in the past and both spouses rolled their 401(k)s over to IRAs. The husband rolled his after-tax money over to a separate IRA in Sept. 2004. The rollover amount of the after-tax portion was $178,000 and that account has now grown to $432,000. I am assuming that the growth on this is taxable as ordinary income, is this correct? If we begin converting this to a Roth, I assume that the pro rata rules will kick in and a portion of each dollar converted will have basis and a portion will be ordinary income, correct?
The wife rolled her plan over in Oct 2010 and all after-tax dollars and pre-tax dollars were rolled over into the same IRA. Is there any way of rolling out the basis here or will the pro rata rules make this virtually impossible?
Basically, is there any way to undo or redo these to optimize the way that these dollars are held.
Permalink Submitted by Alan - IRA critic on Tue, 2013-07-16 03:53
Unfortuneately, both spouses are now subject to the pro rate rules, and it does not matter when the various rollovers were done since once basis is rolled to an IRA, it can only come out pro rata. The only way to undo this is to roll the pre tax balance of each IRA into the current employer’s plan if the plan will accept IRA rollovers and the spouses are employed. As it is now, the first distribution either spouse takes should be reported on Form 8606 and the after tax amount rolled into the IRA previously should be listed on line 2 of the 8606. Hopefully, they kept records or the 1099R reporting the prior distributions from the 401k plans showing the amounts of after tax basis distributed.