Rolling 401(k) aftertax funds to an IRA

Submitted by ShipsnGiggles on Tue, 2018-01-30 16:09

401(k) participant has after tax dollars (non Roth) that he is directly rolling/converting to a Roth IRA
Earnings portion of the distribution is being rolled to a traditional IRA –

Question:
Is the participant required to file form 8606?

Changing the original scenario slightly – what are the 8606 requirements if the participant rolled the after tax dollars directly to a traditional IRA (instead of a Roth)?

thank you



Submitted by Alan - IRA critic on Tue, 2018-01-30 16:28

  • No 8606 is needed because the funds going to the TIRA are pre tax. No basis is going to the TIRA as it is all going to the Roth IRA if the direct rollovers are done correctly per Notice 2014-54.
  • If there was an error in the rollover process or request and after tax dollars did go the TIRA, then an 8606 should be filed when it would otherwise be necessary. It should not be filed in the tax year of the rollover unless there was another reason to file an 8606.
  • If a taxpayer had this happen and a large after tax amount went into the TIRA, he might try to roll his pre tax TIRA assets into the 401k plan, leaving only basis in the TIRA which he could then convert to Roth tax free. Of course, his plan would have to accept rollovers from an IRA. An 8606 would still be filed in the year of the TIRA conversion both to report the conversion and to add the basis on line 2 of the 8606. That would make the conversion tax free.
  • Usually, the so called mega back door Roth conversion after funding the after tax sub account is done frequently enough so that there is only a small balance of earnings. To simplify this process most people roll the entire balance of the sub account to a Roth IRA (or IRR to Roth 401k), paying tax on the small balance of earnings. That also reduces the risk that a split Notice 2014-54 rollover gets messed up either by the taxpayer, the plan, or the IRA custodian.

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