Aftertax Conversions to a Roth and Form 8086
I had an Employer 401k account which contained $49,465 in after tax contributions. As long as the funds were in this plan the contributions were tracked separately by the administrator. I wanted to convert the $49,465 to a Roth. In order to convert the funds to a Roth, my plan required me to roll over my entire 401k to an IRA, which I did in 2021. Unfortunately I didn’t realize that in an IRA the pretax and aftertax contributions would be commingled. In any case, I still had my 2021 1099-R which shows in Box 5 the Employee Contributions/Designated Roth Contribution as $49,465.
In 2022 I went about converting the entire $49,464 to a Roth. I was also required to take an RMD of $31,892. My 2022 1099-R shows this as a single distribution of $81,357. So to my thinking $31,892 should be taxable and $49,464 should be non taxable, but figuring out how to record this on Form 8606 is elusive. Form 8606 calculates the tax as a percentage when it seems to me the taxable amount should be a flat dollar amount based upon $31,892.
Permalink Submitted by Alan - IRA critic on Fri, 2023-08-18 21:21
You should have simply done a split direct rollover in 2021, with the pre tax total directly rolled to your TIRA and the 49.465 to your Roth IRA. Or if your plan would not direct the rollover to different plans, you should have asked that the 49,465 be distributed to you personally, after which you could have rolled it to your Roth IRA. However, now that the after tax dollars are commingled in your TIRA, you can add that amount as IRA basis on line 2 of the first 8606 required to be filed after the rollover. The 8606 will pro rate any 2021 IRA distribution and your 2022 RMD and also your 2022 RMD and conversion. The dollar amounts of IRA basis are converted into a % of taxable/non taxable distributions by Form 8606. Both your 2022 RMD and the conversion (which should have been done AFTER the RMD) will have the same % of taxable/non taxable even though the 8606 separates the converted amount (which also is summarized in Part II) from the non converted (RMD) amount.