After-tax IRA Conversion
I maxed out my traditional IRA for several years, and it was all after-tax money (never deducted), but did not convert it. Let’s say the basis is $40,000 and the account balance is $50,000. I know if I convert all of this to a Roth IRA, the $10,000 of gains will be taxable. Is it possible to roll that $10,000 into my current 401(k) plan, and leave the remaining $40K after-tax money in the IRA, and then do the conversion to Roth? Would this then make the conversion non-taxable?
Permalink Submitted by Alan - IRA critic on Wed, 2024-09-04 16:58
Yes, if your 401k would accept an IRA rollover from a contributary IRA (one that received regular IRA contributions) you could roll the value in your IRAs that exceed your basis to the 401k and then convert the IRA basis tax free. Not sure if this is all worth it for just a 10,000 rollover. If you did not do the rollover and then converted half the IRA for 2 years, the taxable income for the conversions would be around 5000 each year.
Be sure you reported all these non deductible contributions on Form 8606 each year you made them, as those forms document your IRA basis to the IRS. You also report any conversions on Form 8606.
Permalink Submitted by Kayla Andrews on Wed, 2024-09-04 17:00
Thank you! Is there a specific IRS guideline that I can refer to for this strategy being allowed?
Permalink Submitted by Alan - IRA critic on Wed, 2024-09-04 17:29
The central explanation for why the IRA basis can be separated comes from the following paragraph copied from p 21 of IRS Pub 590-A:
“Tax treatment of a rollover from a traditional IRA to
an eligible retirement plan other than an IRA. Ordinarily, when you have basis in your IRAs, any distribution is considered to include both nontaxable and taxable
amounts. Without a special rule, the nontaxable portion of
such a distribution couldn’t be rolled over. However, a special rule treats a distribution you roll over into an eligible retirement plan as including only otherwise taxable
amounts if the amount you either leave in your IRAs or
don’t roll over is at least equal to your basis. The effect of
this special rule is to make the amount in your traditional
IRAs that you can roll over to an eligible retirement plan as
large as possible.”