Non Roth After Tax Contributions paired with In Plan Roth Conversion

Submitted by Brian Devers on Mon, 2018-04-30 15:19

Within a qualified retirement plan that permits :
– Non Roth After Tax Contributions
paired with
– In Plan Roth Conversions

I assume EACH in-plan Roth conversion has a new five year clock attached to it in order to be considered a qualified distribution?

Who would be responsible for record keeping of each conversion?

AND, especially if there are “monthly conversions” (as we have arranged in our company plan, so as to keep the taxable increments low/nonexistent)



Submitted by Alan - IRA critic on Mon, 2018-04-30 16:08

  • The 5 year holding requirement for an IRR (or Roth IRA conversion) is immaterial for qualification. It applies only to the 10% penalty if such IRR is withdrawn before completion of the 5 years. All IRRs done in the same calendar year are combined with respect to the 5 year holding period which starts on 1/1 of the IRR year. Of course, if an IRR is the FIRST Roth contribution of any kind to that plan, the 5 year holding period for qualification of the account also begins on 1/1 of that same year. The plan administrator is responsible for record keeping and 1099R reporting in the event of a distribution. Conversely, for a Roth IRA the Roth IRA owner is responsible.
  • Note that in your case your IRRs will be almost totally non taxable because they will be done so soon after the contributions. The 10% penalty only applies to the taxable portion of the IRR. For example, if you 12 IRRs a year of after tax contributions of 30,000 and the total values at the time of the IRR were 31,000, then only 1,000 is subject to the 10% penalty should you withdraw anywhere between 1,000 and 31,000 of those IRRs before 5 years is completed. 
  • Your plan may have special accounting procedures for losses before you do these IRRs. Suppose 4 of your after tax contributions incurred losses at the time of the IRR and 8 had gains. The plan might apply the loss to the gains at year end, or it might wash out the losses and not apply against the gains for the other 8 IRRs. Of course, if your after tax contributions are not made into stock funds, the amounts of gain or loss will be minor.

Submitted by Charles Wilfong on Mon, 2018-04-30 18:59

i have client who does not have any traditional irs accounts yet inherited a deceased brother’s ira and continues to be maintained as a “deceased ira for the benefit of” client.client made a non decutable traditional ira contribution in 2017 and then converted to a roth ira in 2 days following.Client’s accountant says that the conversion is taxable tothe extent of the pro rata rule but I believe and have been able to find in the IRS code that inherited IRA’s are not included in the pro rata rule. Does anyone have a better understanding?

Submitted by Alan - IRA critic on Mon, 2018-04-30 23:12

This should have been a new post, since it is unrelated to the original thread.  However, the accountant is incorrect because basis in an owned IRA is not affected by any basis that may or may not exist in an inherited IRA. The Form 8606 used to report the non deductible contribution and conversion should NOT include the value of the inherited IRA on line 6. This is clearly stated on p 5 of IRS Pub 590 B.

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