IRA non-deductible basis rollover to 403b

Submitted by Patrick McGinty on Wed, 2016-05-11 19:06

We completed a 100% rollover of a client’s IRA (her only IRA account) to her 403(b) account in 2014, not realizing at the time that she had about $10,000 of non-deductible basis affiliated with this on her 8606. We just learned of this from her tax returns.

Question 1: Do you forfeit the non-deductible basis when you complete a transfer of this nature?

Question 2: If no above, then what are some of the ways the non-deductible basis can be utilized?
a.) Utilize it with each distribution from her 403(b) accounts
b.) Transfer back exactly $10,000 (the non-deductible portion) to an IRA then convert it to Roth?

Question 2(b) is really the solution we’re hoping for, but it does seem a stretch. I’m assuming transfers are treated pro-rata (not FIFO or LIFO) just as a distribution would be right?



Submitted by Alan - IRA critic on Wed, 2016-05-11 21:24

The following is from IRS RR 2014-9:

Section 1.401(a)(31)–1, Q&A–14, provides that if a plan accepts an invalid rollover contribution, the contribution will be treated, for purposes of applying the qualification requirements of § 401(a) or 403(a) to the receiving plan, as if it were a valid rollover contribution if two conditions are satisfied. First, when accepting the amount from the employee as a rollover contribution, the plan administrator for the receiving plan must reasonably conclude that the contribution is a valid rollover contribution. Second, if the plan administrator for the receiving plan later determines that the contribution was an invalid rollover contribution, the plan administrator must distribute the amount of the invalid rollover contribution, plus any earnings attributable thereto, to the employee within a reasonable time after such determination. 

The plan will not be happy when notified of this disallowed rollover amount, and when they report the corrective distribution on Form 1099R it will likely be coded to not allow a rollover back to the IRA. The 1099R Inst do not include specific guidance on reporting this type of corrective distribution. It is also unlikely that such a distribution would be rollover eligible, so while only the earnings will likely be taxable, the end result could be that the IRA basis ends up distributed without tax and the basis will have been eliminated from the IRA and Form 8606. Again, I am not aware of specific guidance relative to restoring basis to the IRA, but it should hinge on whether the 1099R indicates an IRA rollover is possible and if the 1099R is correct given such lack of specific guidance. 

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