Backdoor After-Tax to Roth in 2022?
Hello,
Are there any expectations on how the potential rule changes will be implemented? If they truly eliminate the option to convert/roll Post 86 after-tax cost basis to a Roth does that mean they can only be cashed out or rolled to a Rollover IRA and comingle the sources?
For example:
401K = $1M of which $200K is Post 86 after-tax cost basis and the rest is earnings and pre-tax.
2021 – You can simply split the account to a $200K Roth IRA and $800K Rollover IRA
2022? – Would the full $1M have to be rolled to a Rollover IRA and the cost basis kept track of? So, if a withdrawal was taken immediately of $10K, it would be 20% tax free due to the a/t cost basis. However, what if you wanted to convert $100K of that. Would it still be the case that $20K of the conversion is tax free and $80K is taxable meaning that the after-tax can still be moved to a Roth, but just must be proportionate and can’t be separated. If true, the only way to get the full $200K to a Roth after 2022 will be to convert the entire account.
If you want to separate the after-tax in 2022 or beyond, you will have to do so in the 401K rollover and move that to a brokerage or savings account and just roll the $800K, right?
So, if you want to get your full cost basis of $200K to a Roth, is the only option is to do it in 2021 unless you want to convert the entire balance in 2022 or later?
Permalink Submitted by Alan - IRA critic on Thu, 2021-11-18 18:31
You have this correct. If this provision passes as currently drafted, you only have 6 weeks left to isolate your basis to a Roth IRA. After that your choices are either a tax free distribution of the after tax amount which you would then invest in a taxable account (pre tax 401k dollars rolled to either a TIRA or Roth), or a full 1mm direct rollover to your TIRA after which you would file an 8606 to report 200k in IRA basis on line 2, and then have all future distributions including RMDs pro rated on Form 8606. Any TIRA conversion you would do after 2021 would then be 100% taxable. That would raise your basis % of your TIRA but you would be stuck with pro rated distributions for life. Other direct rollover and distribution combinations are also available as to amounts, as long as no after tax dollars are rolled to your Roth IRA.
Permalink Submitted by Wesley Boudreaux on Fri, 2021-11-19 17:19
Thank you!That is unfortunately what I expected and it may make things a nightmare going forward if passed.