Non Deductable IRA distribution

Submitted by Chris Zuck on Tue, 2024-06-25 19:42

I have onboarded a new client who is under 59 1/2 and in prior years attempted to do a back door Roth.  The former advisor did not remove the contribution when the advisor learned there were more IRA’s and the pro-rata rule applies, just left the funds in the traditional IRA.  Now there is a cost basis that needs to be tracked and a very minor portion of the IRA.  Is it possible to remove the non-deductible contribution that occurred several years ago without penalties or using 72-t rules?



Submitted by Alan - IRA critic on Tue, 2024-06-25 21:12

No, the only way to isolate the TIRA basis is to roll the pre tax IRA balance into a current employer plan. The remaining IRA basis can then be converted tax free, and therefore eliminated. Perhaps client currently has a workplace plan that accepts IRA rollovers. The plan might also allow the pre tax amount rolled into it to be rolled back out in the year following the tax free conversion.

Submitted by Chris Zuck on Thu, 2024-06-27 14:18

If I understand correctly, can I pull the non-deductible portion out and pay a penalty, if so how would that be calculated?

Submitted by Alan - IRA critic on Thu, 2024-06-27 22:53

For years in which the due date has passed, specific year contributions can no longer be returned separately. All distributions must be reported on Form 8606 with the basis applied pro rata. If a ND contribution was made for 2023, the extended due date (10/15/2024 if client either filed 2023 on time or filed an extension) is the deadline to withdraw the specific 2023 contribution with allocated gain or loss. For years prior to 2023, everything comes out pro rata (so called cream in the coffee rule). That leaves a roll over to client’s current employer plan (if possible) as the only solution to separating the basis from the pre tax amounts, followed by a tax free conversion of the remaining basis.

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