rollover IRA that has taxable and non-taxable Contributions

Submitted by Patrick Valenty on Thu, 2017-07-27 19:17

New Client has a rollover IRA. Hs been adding non-deductible contributions.
Has 8606 documentation. Also has a Roth account. Wants to place his non-deductible contributions in his Roth account. His accountant does not know how to do it.

Can someone please recommend the IRS procedure. He intends to retire soon and wants to rollover his 401k but does not want the 8606 to deal with every year.

Thank you in advance.



Submitted by Alan - IRA critic on Thu, 2017-07-27 20:44

First, if he has been making regular contributions to the rollover IRA, it is no longer a rollover IRA. He also now has basis in his TIRA and any Roth conversion will pro rate the basis with the pre tax IRA money.  The only way the client can convert the non deductible contribution amount per Form 8606 without also converting pre tax money is to roll the pre tax balance of the IRA into an accepting employer plan. That will leave only his basis in the IRA and he can convert that tax free. He would probably need to roll the pre tax IRA money into the 401k before retiring, if the plan even accepts IRA rollovers. Once he rolls the 401k into an IRA, the amount of IRA basis % will be lowered and any conversion would have an even higher taxable %. The course of action should therefore be to determine if his 401k will accept the rollover of IRA pre tax dollars from an IRA that is NOT a rollover IRA, and if so complete that rollover, then convert his IRA basis to Roth. Finally, the 401k rollover to an IRA must be deferred until 2018 because rollover of that money to an IRA will undo the benefit of the IRA to 401k rollover. That said, if all this does not come together, he will be stuck with the 8606 for life, but with current tax programs, this is not much of a problem.

Submitted by Patrick Valenty on Sat, 2017-07-29 21:29

Thank you for your reply.  I took your reply to two Tax preparers.  Both said the answer was confusing.  Perhaps you could simplify,  By addressing the answer in steps. i.e. Step one, step two.One other stated since the 8606 documents the basis by %.  Could the client just take the after tax % out of the Rollover to the Roth account and leave the taxable % in the rollover.  That would mean the rollover has a 100% taxable money.  Thank you for you assistance.

Submitted by Alan - IRA critic on Sun, 2017-07-30 00:02

  • If client wants to move only the non taxable amount to his Roth IRA which would also eliminate the 8606 for subsequent years, there is only one way to accomplish that. Client must use a special rule under which ONLY pre tax money is moved OUT OF his IRA into a non IRA plan. The only such plan possibly willing to accept that money would be his current employer plan. Therefore, the first step is contacting his plan and asking them if he can roll the pre tax balance of his IRA (total IRA less his basis from Form 8606) into that plan before he retires. If so, he can proceed. If not, he will be stuck with pro rating all his distributions on Form 8606 as long as he still has a TIRA account. If interested, after Step 1 is done, I can advise what his tax return should look like.
  • Step 1 – find out if his 401k will accept his pre tax IRA money
  • Step 2 – If so, he can convert his IRA basis to his Roth IRA tax free.
  • Step 3 – Transfer the pre tax money left in his TIRA after the conversion into his 401k plan
  • Step 4 – Retire, then no sooner than 2018 do a direct rollover from his 401k into a rollover TIRA. This cannot be done this year or it will derail the benefit of the first 3 steps and cause his conversion to be taxable.

Submitted by Alan - IRA critic on Sun, 2017-07-30 00:51

Here is a paragraph from p 21 of IRS Pub 590 A describing the special rule noted above:

Tax treatment of a rollover from a traditional IRA to an eligible retirement plan other than an IRA. Ordinarily, when you have basis in your IRAs, any distribution is considered to include both nontaxable and taxable amounts. Without a special rule, the nontaxable portion of such a distribution could not be rolled over. However, a special rule treats a distribution you roll over into an eligible retirement plan as including only otherwise taxable amounts if the amount you either leave in your IRAs or do not roll over is at least equal to your basis. The effect of this special rule is to make the amount in your traditional IRAs that you can roll over to an eligible retirement plan as large as possible.

Submitted by Ben Meyer on Sun, 2017-07-30 06:23

  • In the interest of flagging an important point, it is very important to be sure that both steps 2 and 3 are both completed during 2017.  This means that the Roth conversion of step 2 must be received and credited into the Roth IRA in 2017, and the rollover of step 3 must be received and credited into the 401(k) during 2017.  Get it all done well before the middle of December.
  • The wording of the quotation from Pub 590-A may imply that step 3 should be performed before step 2, but the reporting and taxation won’t be affected so long as both steps are performed and completed in the same year.  (Performing the steps in the order Alan stated has the advantage that any small earnings after performing step 2 will be swept into the 401(k), and that step 2 will be tax-free.)
  • This also assumes that the taxpayer will retire before the year he reaches age 70 1/2, and that he has not made any after-tax voluntary contributions to the 401(k), and that the 401(k) is not a designated Roth 401(k) account.

Submitted by Jonathan Kleinwaks on Sat, 2024-02-03 19:40

Appreciate the detailed info.  Question.  Roth conversion of TIRA Basis was rec’d and credited in Dec 2023 but direct rollover of pre-tax to 401(k) mailed in 2023 but not credited until early Jan 2024.  Problem?  Thanks.

Submitted by Alan - IRA critic on Sat, 2024-02-03 23:01

Not a problem if you received a 1099R for either a distribution or a G coded 1099R for a direct rollover since the 1099R shows that the funds were out of the IRA by year end. Further, the fact that the funds were not yet deposited into the 401k does not matter as the 8606 Instructions state that distributed IRA funds that are rolled to a qualified plan (401k) are not outstanding rollovers that must be shown on Form 8606, line 6.

Submitted by Jonathan Kleinwaks on Sun, 2024-02-04 00:50

Thanks so much Alan.  I always find your comments to be the best as you always explain the basis for your position.

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