IRA: can you split a Traditional IRA that has both before and after tax funds into a Traditiona and Roth IRA?
I have a client who has an IRA worth $100,000, of which $80,000 is before tax and $20,000 is after tax dollars. Can that IRA be transferred and split with the $20,000 after tax dollars being roller over to an IRA and the remaining $80,000 to a Traditional IRA?
If so how would you/could you allocate the earnings on the after tax dollars to the IRA?
Where can I get documentation on this question?
Permalink Submitted by Alan - IRA critic on Thu, 2015-03-26 19:50
This can only be done by rolling the pre tax balance into an accepting employer plan using a special rule allowing the pre tax balance to be distributed from the IRA first without pro rating. Then the after tax balance remaining can be converted to a Roth IRA tax free. A TIRA with non deductible contributions in it can only be distributed pro rate when doing a Roth conversion. You can see the math by checking Form 8606 on which the conversion must be reported, or page 14 of Pub 590 B. In your example doing a direct conversion would result in 80% of the converted amount being taxable.