non deductable IRA
I have a client that comingled deductable and nondeductable IRA contributions into one mutual fund. Is it possible to transfer the Nondeductable contibutions to an IRA. Also, since after tax 401k contributions can be transfered to a Roth IRA can this nondectable monies be transfered to a Roth and if so how? Does it first need to be transfered to a nondectablr tradional IRA and converted to a Roth IRA or simply transfered to a Roth IRA. Thank you
Permalink Submitted by Alan - IRA critic on Mon, 2015-01-26 16:47
Since all TIRA accounts are considered combined for tax purposes, it does not matter which account receives a non deductible contribution and separation does not accomplish anything with one exception. If the client can roll the pre tax balance of all IRA accounts into an accepting employer plan, the remaining non deductible balance (as reported on Form 8606) can then be converted to a Roth tax free. Otherwise, any conversions to a Roth IRA will be pro rated between the pre tax and after tax amounts of all owned TIRA accounts. The type of split direct rollovers that can be done from an employer plan cannot be done with IRA funds unless the exception noted above is executed.
Permalink Submitted by Allen Myrowitz on Mon, 2015-01-26 20:05
Are you recommending transferring the deductable ira contributions and all account growth be transfered first and then the nondectable contributions transfered to a Roth
Permalink Submitted by Alan - IRA critic on Mon, 2015-01-26 22:50
Either way. If client has checked and is sure that the employer account will accept the entire pre tax IRA balance even though the TIRA is not a rollover IRA, then the conversion of the after tax basis can be done first, and then the remaining total transferred to the employer plan before the end of the year. If there is a doubt regarding the employer plan accepting the IRA pre tax money, best wait for that to be done before doing the conversion of what is left.
Permalink Submitted by Allen Myrowitz on Tue, 2015-01-27 17:53
You continue to mention employer account. My client currently has all her monies ina a pesrsonal IR, a comingling of nondectable contributions and deductable contributions. Sorry if I gave you confusing information.
Permalink Submitted by Alan - IRA critic on Tue, 2015-01-27 17:59
I mention an employer account because rolling the pre tax IRA total into such an account is the only way to separate out the non deductible IRA contributions (ie reverse the commingling) so they can be converted tax free. As it is now, any Roth conversion must include a pro rated amount of pre tax amounts and IRA basis from non deductible contributions. As a result, these conversions would be mostly taxable. There is no way to rearrange the TIRA accounts so that the non deductible amount is all in one account because that amount floats over all TIRA accounts as a single total.
Permalink Submitted by Allen Myrowitz on Tue, 2015-01-27 19:43
Thank you. I understand. Is it possible to transfer the amount of the nondeductable IRA contribuitions to a traditional IRA and maintain that new IRA as a nondectable IRA?
Permalink Submitted by Alan - IRA critic on Tue, 2015-01-27 19:57
You could do it, but it would produce no benefit for you. The non deductible amount is applied to the total value of all your accounts, so it does not matter which account holds the non deductible contributions. It also does not matter which IRA account you use to take the distribution from because of the same rule. There actually is no such thing as a non deductible IRA account, there are only non deductible IRA contributions. This is sometimes called the “cream in the coffee” rule. Once you pour a non deductible contribution into the coffee it is spread throughout the total. So when you pour some out (distribution), a portion is always part cream and part coffee. Remember, if you can roll the pre tax total to an accepting employer plan (401k, 403b), that is the only way to actually separate out the pre tax amount.
Permalink Submitted by Allen Myrowitz on Tue, 2015-01-27 20:08
Thank you.