Getting non-deductible contributions out of IRA
Financial planner with whom I share multiple clients has posed the following question:
Client has existing IRA created by rolling over 401(k) from prior employer. Subsequent to that rollover and before meeting the current financial adviser, another adviser had the client make a non-deductible contribution (for 2015 so it is too late for a recharacterization or withdrawal) into this same rollover IRA. New adviser wants to know if there is any way to remove it now without the pro-rata basis calculations so they can get back to an IRA with no non-deductible money in it.
Any ideas? My only thought was if he had a new employer 401(k) now that would accept a rollover, might he be able to roll all except that non-deductible contribution back into the new 401(k) and distribute the non-deductible contribution, or would all that still be subject to the pro-rata calculations?
Anyone out there who can address this?
Margaret A Stallworthy CPA
Phoenix, AZ
Permalink Submitted by Alan - IRA critic on Mon, 2017-05-15 20:14
What you suggest is the only way to separate the non deductible contribution. The IRA basis could then be either distributed tax free or converted to a Roth IRA tax free. If client only has a basis of 5500, they are probably more concerned with dealing with Form 8606 every year they take a distribution to recover perhaps a very small portion of the distribution tax free. Of course, if they have new employer plan that will accept IRA rollovers, they need to determine if the expenses paid on their investments will be higher than they are paying in the rollover IRA. I would not roll a large amount into a plan that will result in higher expenses or limited investment options. If the IRA basis is only 5500 and they do not want to deal with the 8606, they could just not file the 8606 but that would cost them less in the long run than paying higher expenses than necessary on a much larger amount.