IRA and Roth contributions
Hello,
I have a client who’s IRA was partially funded with an after-tax rollover from a 401-k in 2003 with $84,027 plus random after-tax contributions totaling $106,027. He is now 73 and the account is worth $412,000 and we must start RMDs.
How is this account to be treated for RMD purposes?
The client now realize that the original after-tax contribution should have gone into a Roth IRA. Is it too late to do so? I think the client would need to start taking RMD’s in 2025 and they would need to keep track of the Roth basis because our custodian does not keep track.
Any feedback would be greatly appreciated. Thank you.
Permalink Submitted by Alan - IRA critic on Thu, 2025-01-16 11:26
Rollovers of after tax 401k funds to a Roth IRA were not allowed until 2008, therefore no error was made in 2003.
The Form 8606 Inst indicate that IRA basis from after tax 401k amounts should be reported on line 2 of the next 8606 otherwise required after the rollover. If this has not been done, suddenly showing 106k on line 2 of an 8606 could result in a red flag at the IRS, and client may have to provide documentation that this amount was after tax dollars, perhaps with a copy of the 2003 plan statement or the 1099R from that year. Passing that hurdle, the only way to separate this basis to enable a Roth conversion is to have an available qualified plan that would accept an IRA rollover of the pre tax IRA value, leaving behind only the 106k of basis, which could then be converted.
If this is not possible, client is stuck with pro rating every distribution including RMDs using Form 8606. If his total IRA value was 1mm, then 106k of basis would result in 10.6% of every distribution being non taxable, so he would gradually recover a portion of his basis every year. When he passes, his beneficiary would inherit the remaining basis and could also use it through Form 8606.
However, if his IRA value is small and basis % large, he could convert some each year partially tax free. This should probably have been done before RMDs begin since he must complete his total RMD before converting any additional amounts.