After Tax Rollover to Traditional IRA
A client did a rollover of after tax funds into a traditional IRA. Funds have not been co-mingled but have earnings after 18 years. Client is now 73 and needs to take RMDs. Can they remove the original after tax amount and transfer to a Roth IRA or do they have to take a pro-rata distribution each year?
Permalink Submitted by Alan - IRA critic on Fri, 2025-02-07 11:35
All IRA distributions, whether RMDs or not must be pro rated on Form 8606 to determine the taxable amount. The after tax 401k (or other plan) amount should have reported on line 2 of the next 8606 otherwise required after the rollover. In other words, the after tax amount has been commingled for tax purposes even if separate IRA accounts were maintained because all IRA accounts are treated as one combined account.
The only way to separate the IRA basis from the pre tax amount is to roll the pre tax balance back to a qualified plan, but that’s not possible if client is retired. Another option while not practical, is to take all RMDs as QCDs until the pre tax amount is eliminated, and then convert the remaining IRA basis.
Unfortunately, the 401k rollover could not clearly be split into 2 rollovers (after tax to Roth) until 2014, and it sounds like client’s 401k rollover including after tax amounts was done before then.
As it stands, client must complete the RMD each year before converting, but any conversion done after the RMD would have the same taxable portion as the RMD, meaning that a portion of the conversion would be non taxable.