IRA Aggregation Rules Interpretation

Submitted by James Clark on Tue, 2013-12-10 19:32

As a preface to my question, I have a retired client sge 70 1/2, who is about to roll over her 401(k) from her former employer. Her 401(k) account breakdown is as follows:

Pre-Tax account balance: $402,201
After-Tax account balance: 334,140
Pre-1987 After-Tax: 271,391
Company Match: 957,997

Pre-87 After-Tax Basis: 14,420
Post 86 After-Tax Basis: 56,832

My Question: I had planned to take her After-Tax basis (both pre and post) and transfer these to a taxable brokerage account; not part of her rollover. My client has mentioned that someone in the HR Department of her former employer had metioned that she could transfer her after tax basis to a non-deductible IRA and then convert it to a Roth.
Don’t the new aggregation rules effectively eliminate the benefits of the Roth by forcing her to withraw, pro-rata, the percentage of her non-deductible IRA that would be converted?

Thank you for any consideration you can provide me with.

Jim Clark, ChFC



Submitted by Alan - IRA critic on Wed, 2013-12-11 03:21

  • Re your question, basis rolled to an IRA will be subject to the pro rate rules involving all non Roth IRAs for the year of a conversion. However, she could roll much of the after tax basis directly from the plan to a Roth IRA and avoid the IRA pro rating rules of Form 8606.
  • How she should proceed is a question because I do not understand your breakdown. Her total basis is the sum of the pre 87 basis and the post 86 basis. You are showing pre 87 basis twice.
  • Note that the plan must withhold her 2013 RMD from any rollover. Either post or pre tax amounts will count toward the RMD.
  • She needs to confirm how much of her basis is in a separate after tax sub account
  • Even with the added data, isolation of basis for conversion is subject to IRS uncertainty of varying degrees depending on how the rollovers are done
  • Being so late in the year, the best thing to do right now is to see if she can get a distribution of the pre 87 (grandfathered) after tax amount only. There is no question that this amount can be separately distributed and rolled to a Roth IRA without tax, except that the 2013 RMD amount cannot be rolled over. Then she can tackle the more debatable balance next year.

Submitted by James Clark on Thu, 2013-12-12 04:29

Alan:  The breakdown cost basis given was exactly as stated on the client’s 401(k) statement.  As I understand it, Pre-87 at one time was allowed to be withdrawn separate from any rollover without tax. Post 87 withdrawals required one dollar of Pre-Tax withdrawal for each dollar of After-Tax withdrawn.  If this client can withdraw her Pre-87 After-Tax amount free of any taxes and roll it to a Roth, that is exactly what I wanted to confirm before proceeding.  She will take her RMD as well.My interpretation of the aggregation rules led me to believe that such a Roth rollover would be rendered almost useless because her tax free treatment % would be confined to the ratio of her After-Tax basis to the total value of all IRA accounts.Thanks.

Submitted by Alan - IRA critic on Thu, 2013-12-12 16:21

The pre 87 after tax contribution amount is apparently 14,420. This can still be distributed separately upon specific request and is not subject to pro rating. If the other post tax amount of 56,832 is kept in a separate sub account, that also could be distributed separately in some plans, but the plan administrator would have to clarify if that is possible. If so, that would satisfy the RMD, but not leave much in excess of the RMD to be rolled to a Roth IRA. There would be no need to do a direct rollover of totally after tax amounts because withholding would not apply, so client could do the Roth rollover herself. Then the remaining pre tax balance in the plan could be distributed in a separate direct rollover later on. In your last sentence I think you meant the “total value of the plan” rather than IRA accounts.

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