401K after-tax contributions

Submitted by Christopher Combs on Sat, 2014-05-24 21:58

Hello,

A client decided to roll his 401K into a Traditional IRA. We received a check from the plan for $467K that lists $2K as “contributions already taxed.” This check has not been deposited yet. I wanted to confirm the client’s options:

1. Deposit the check into the Traditional IRA and then list $2K on Form 8606 in the future so that the client is not taxed twice on that withdrawal when his RMDs start.

Is this correct?

2. Call the plan and ask them to stop payment and issue two new checks: one for the pre-tax amount ($465K) to be rolled directly into the Traditional IRA, one for the contributions already taxed ($2K) to be rolled directly into a Roth IRA.

Is this correct?

We had another client execute on #2 in 2012 and because the plan administrator issued a 1099R with -0- in Box 2a, we were in good shape. I’m not sure if the IRS has changed it’s position on these transactions.

Thank you,

Chris



Submitted by Alan - IRA critic on Sat, 2014-05-24 22:40

  1.  Correct. Client should make a note to file the 8606 to report the 2k on line 2 with the next return in which an 8606 is required for another reason. He should not file it with the current tax return unless the 8606 is otherwise required.
  2. This is another option if client thinks it is worth the hassle for as small an amount as 2k. Isolation of basis methods are somewhat uncertain but employees have been successfully doing separate rollovers for the last 4 years without any challenge from the IRS. The IRS has not issued further guidance on this subject.

Add new comment

Log in or register to post comments