IRA taxable distribution?

Submitted by Bret Steffenauer on Wed, 2014-04-23 17:36

I have a new client who back in 2009 rolled over his entire 401K balance into his self directed IRA. No 8606 was completed at the time nor do I believe should have been.
$600,000 was the total rollover of which $100,000 was after tax money. Now in 2013 for the first time he took a distribution from the IRA. He’s claiming he can exclude and show on form 8606 his basis ie (after tax contributions)and exclude his “non-deductible” portion of his distribution. I have the belief you cannot roll over non-deductible qualified plan money without it ALL being taxable when it comes out. I reviewed some information from irs pub 590 which may support the client position. Can anyone tell me if I am correct? IF you roll over after tax money from a qualified plan into an IRA, can you retain “basis” or is all money taxable when it comes out of the IRA?



Submitted by Alan - IRA critic on Wed, 2014-04-23 22:31

Since 2002 a taxpayer can roll after tax qualifield plan funds to an IRA. The Inst for form 8606 indicate that in this situation, the form should not be completed until the year where it is otherwise required, 2013 in his case. The 100k should be added to line 2 of the 8606 and this is added to line 1 to get the total IRA basis. Client needs to be sure that this after tax rollover occurred, and should check his 1099R forms from the plan to be sure he is correct about this basis. Some people would have taken the 100k and rolled it into a Roth IRA instead of a traditional IRA.

Submitted by fairira on Wed, 2014-04-30 18:03

Alan,1. The initial post says  the client ” . . . is claiming he can exclude and show on form 8606 his basis ie (after tax contributions) and exclude his “non-deductible” portion of his distribution.”  I think the last clause means the client expects he will pay no income tax on the 100K distribution whereas I think the “pro rata” rule will apply and at least 5/6 of the distribution will be taxable.2. Re your comment:  “Since 2002 a taxpayer can roll after tax qualifield plan funds to an IRA. The Inst for form 8606 indicate that in this situation, the form should not be completed until the year where it is otherwise required, 2013 in his case.”  As always you are correct but I also thought that in the past you also suggested filing Form 8606 when a rollover is done from a 401(k) to an IRA just to create the record of this at the time so that one does not risk forgetting to do so when the Form 8606 is in fact later required.Your comments would be appreciated.

Submitted by Alan - IRA critic on Wed, 2014-04-30 20:08

  • Yes, I see no downside to filing the form prematurely if there is any risk of eventually overlooking the need to file it. It is unlikely that the IRS would reject the line 2 entry, but if they did the IRA owner would then have to make sufficient notes to file the form in the year the 8606 would otherwise be required. There is a way to combine these two approaches as well. In the year of the after tax rollover, take out a $10 distribution which will trigger the need to file the 8606 showing the updated IRA basis and get this out of the way. Of course most of the $10 will be taxable and possibly subject to penalty, but for those who want to put this issue to bed up front so they can forget about it, this presents another option and also complies with IRS instructions.
  • The original post indicated client wanted to exclude the non deductible portion, which I took to be the pro rated portion per Form 8606. In the event client expected to recover the basis fully before paying taxes, that is of course not possible.

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