Rollover of after-tax funds from traditional IRA to Roth IRA
In 2004, I completed a total rollover of a 401k containing pre-tax and after-tax funds into a traditional IRA. The after-tax funds were not in a Roth 401k. The rollover distribution was about 5% after-tax. Now, in 2016, can the original after-tax distribution be rolled in entirety into a Roth IRA as a non-taxable event?
Permalink Submitted by Alan - IRA critic on Wed, 2016-01-27 20:40
No, not unless you roll over the entire pre balance of your TIRA into an accepting employer plan. If you leave just the after tax balance in your IRA, you can then convert it tax free. Note that IRS instructions require you to report the after tax amount rolled into your IRA on the next 8606 form otherwise required. If there have been interim distributions or conversions since 2004, then you need to reconstruct the interim 8606 forms to be correct. For the last 3 open tax years, you would have to amend affected returns. If you have no employer plan to roll your pre tax IRA balance, then conversions will be taxable using the pro rate rules of Form 8606.
Permalink Submitted by Alva Cobb on Thu, 2016-01-28 14:22
I am retired and no employer plan is available for rollover. I have never filed a Form 8606 on this IRA as I have not completed any distributions or conversions since the original rollover. From your reply, I am assuming that any future distributions or conversions are to be handled using the pro rate rules of Form 8606, and that direct conversion of the original after-tax balance into a Roth IRA is not an option.
Permalink Submitted by Alan - IRA critic on Thu, 2016-01-28 17:31
That is correct. When you next make a regular contribution or take your first distribution (or conversion) you can file the 8606 and add the dollar amount of after tax contributions rolled over from the 401k on line 2 of the 8606. That basis would be added to another other basis you might have shown on line 14 of the prior 8606 if you filed one earlier. Then the pro rating calculation would result in all your distributions being partly non taxable. When RMDs start, you would need an 8606 every year, but it is an easy process with a tax program.