Pro Rata Conversion
Client previously had a 401k with pre and post tax dollars. Did a rollover and put the pre tax dollars in a traditional ira and the post tax dollars in a traditional ira (with hope that there would be a change in the rules like what happened last September). Could the client now convert the one traditional ira with the post tax dollars to a roth ira and the conversion be tax free?
Permalink Submitted by Alan - IRA critic on Thu, 2015-03-12 20:23
No. Once post tax contributions are rolled into an IRA, any distribution back out of the IRA must include a pro rated mix of pre tax and post tax IRA dollars as calculated on Form 8606. Unfortuneately, as it turned out, client could have isolated the basis to a Roth IRA when the rollover was done and the IRS will not contest that now. Of course, prior to Sept, 2014 and Notice 2014-54 it was not clear whether one or more isolation of basis strategies would be contested or not. As it stands now, client can only file the 8606 showing the additional IRA basis on line 2 the next time an 8606 would otherwise be required. That will at least avoid double taxation.