After tax contribution for wife impact husband?
Have a client that made a 6,500 non-deductible contribution to an IRA. There is a total of $7,500 in the account. Her husband has a 500k IRA. We are about to rollover her old 401k to an IRA and want to avoid the pro-rata rule. If we close her small IRA down, distribute the entire funds, pay tax on the gain, open a new IRA and then roll the 401k over into it will we eliminate the 8606 and pro-rata problem? Want to make sure that somehow the husbands IRA isn’t considered in the equation and that shutting down her IRA, or possibly just distributing all the funds, will solve the problem. Thanks in advance!
Permalink Submitted by Alan - IRA critic on Thu, 2020-02-20 23:02
Husband’s IRA can be disregarded for purposes of client’s distributions. However, if client distributes the 7500 IRA or converts it (a better choice), the distribution will be mostly taxable if her old 401k is rolled over this year. To avoid this issue, her IRA can be converted now but the 401k cannot be rolled over until 2021. Otherwise, the pro rata rules will apply to the distribution or conversion because taxation of the distribution is determined by the IRA balance on 12/31/2020.