IRS Relents! Notice 2014-54 permits Basis Isolation
Re: IRS Relents! Notice 2014-54 permits Basis Isolation
Let me see if I understand all this using a simple scenario:
Individual: Age 60
Wishes to take in-service distribution
$100 of pre-1987 after tax contibutions
$100 of earnings on those contibutions
$100 of post-1986 after tax contibutions
$100 of earnings on those contibutions
On 01/02/2015 (01/01/2015 is a holiday) the pre-1987 after tax contributions can go to a Roth Ira and the earnings on those contributions can go to a traditional Ira per Notice 2014-54
On 01/07/2015 the post-1986 after tax contributions can go to a Roth Ira and the earnings on those contributions can go to a traditional Ira per Notice 2014-54
Assume in house distribution, Fidelity, Vanguard or whoever your 401k plan is with.
Remaining balance in traditional 401k consists of pre-tax contibutions and earnings
Since the individual is not converting funds there would be no form 8606 required and form 5498 should have this activity duly noted for 2015.
Am I close to understanding or not even close?
Individual: Age 60
Wishes to take in-service distribution
$100 of pre-1987 after tax contibutions
$100 of earnings on those contibutions
$100 of post-1986 after tax contibutions
$100 of earnings on those contibutions
On 01/02/2015 (01/01/2015 is a holiday) the pre-1987 after tax contributions can go to a Roth Ira and the earnings on those contributions can go to a traditional Ira per Notice 2014-54
On 01/07/2015 the post-1986 after tax contributions can go to a Roth Ira and the earnings on those contributions can go to a traditional Ira per Notice 2014-54
Assume in house distribution, Fidelity, Vanguard or whoever your 401k plan is with.
Remaining balance in traditional 401k consists of pre-tax contibutions and earnings
Since the individual is not converting funds there would be no form 8606 required and form 5498 should have this activity duly noted for 2015.
Am I close to understanding or not even close?
"..the cavalry ain't comin' kid, you're on your own..."
Re: IRS Relents! Notice 2014-54 permits Basis Isolation
Fyi, kitces response....
"Thanks for reaching out about this!
The “fortunately, your company maintains a separate subaccount” is not always the case in practice. If it IS in place, Thomas’ statements are correct.
Notably, it doesn’t really allow a full isolation. All he’s basically saying is the situation is either:
A) You have one account. It has $100k value including $30k after-tax. 30% of every distribution will be after-tax, and 70% will be taxable.
B) You have two subaccounts. One has $60k value with all pre-tax, the other has $40k value with $30k after-tax. Distributions from the first part are 100% taxable, distributions from the second part are only 25% taxable. (The pro-rata rule applies, just separately to each subaccount.)
In practice, you’ll usually have to make inquiries to the employer and plan administrator to find out if they’re actually handling this as two subaccounts or just one mixed account. It varies by employer. (Anecdotally, I find that many/most end out doing it all in one account, probably to save on administrative costs for tracking two accounts, but it does vary by plan/employer.)
I hope that helps a little?
With warm regards,
- MIchael"
I did send him the fairmark rationalle link... well see
Edit, got a quick reply...
"Well, if it’s a separate account it’s a separate account. If it’s not, it’s not.
The point is that what I wrote and what Kaye is writing don’t disagree. It just hinges on whether the client’s plan REALLY DOES have separate accounts or not. Which you’ll only find out (for better or worse) by checking for that particular client and their plan structure. And you can then proceed accordingly.
Either way, it’s still pro-rata FROM THE ACCOUNT. It’s just a matter of how any accounts there are within the plan.
Does that help?"
I think kaye reaches a little further, assuming separate contracts, that may exist in the same overall account...
"Thanks for reaching out about this!
The “fortunately, your company maintains a separate subaccount” is not always the case in practice. If it IS in place, Thomas’ statements are correct.
Notably, it doesn’t really allow a full isolation. All he’s basically saying is the situation is either:
A) You have one account. It has $100k value including $30k after-tax. 30% of every distribution will be after-tax, and 70% will be taxable.
B) You have two subaccounts. One has $60k value with all pre-tax, the other has $40k value with $30k after-tax. Distributions from the first part are 100% taxable, distributions from the second part are only 25% taxable. (The pro-rata rule applies, just separately to each subaccount.)
In practice, you’ll usually have to make inquiries to the employer and plan administrator to find out if they’re actually handling this as two subaccounts or just one mixed account. It varies by employer. (Anecdotally, I find that many/most end out doing it all in one account, probably to save on administrative costs for tracking two accounts, but it does vary by plan/employer.)
I hope that helps a little?
With warm regards,
- MIchael"
I did send him the fairmark rationalle link... well see
Edit, got a quick reply...
"Well, if it’s a separate account it’s a separate account. If it’s not, it’s not.
The point is that what I wrote and what Kaye is writing don’t disagree. It just hinges on whether the client’s plan REALLY DOES have separate accounts or not. Which you’ll only find out (for better or worse) by checking for that particular client and their plan structure. And you can then proceed accordingly.
Either way, it’s still pro-rata FROM THE ACCOUNT. It’s just a matter of how any accounts there are within the plan.
Does that help?"
I think kaye reaches a little further, assuming separate contracts, that may exist in the same overall account...
Re: IRS Relents! Notice 2014-54 permits Basis Isolation
I work for a large company, that over the years has changed 401K provider multiple times. I don't recall having seen the option for creating different 'sub accounts'. Not sure how this would happen and what would be the advantage. My situation is fairly simple and I believe it is fairly common. I have just one account with a small after-tax balance, created in my early years (when I did not understand the tax implications). Also, in the last several years I have strived to approach the pre-tax contributions threshold without exceeding it or barely exceeding it.
Based on these latest news, I'm about to begin making after tax contributions to the extent allowed by the IRS: <After tax contribution> = 52,000 - (17,500 + <Company match>). Once I qualify (I change job or retire), I will simply roll over (simultaneously) the pre-tax contributions to a TIRA and the after tax contributions to a Roth IRA . This will not trigger any tax liability. Am I missing something?
Based on these latest news, I'm about to begin making after tax contributions to the extent allowed by the IRS: <After tax contribution> = 52,000 - (17,500 + <Company match>). Once I qualify (I change job or retire), I will simply roll over (simultaneously) the pre-tax contributions to a TIRA and the after tax contributions to a Roth IRA . This will not trigger any tax liability. Am I missing something?
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Re: IRS Relents! Notice 2014-54 permits Basis Isolation
Tx_turtle, the way I understand it, you rollover the post-tax CONTRIBUTION to a Roth IRA and the total of pre-tax contributions and gains (from pre and post-tax) to a tIRA.
I get the FI part but not the RE part of FIRE.
Re: IRS Relents! Notice 2014-54 permits Basis Isolation
Good point. I meant to imply (but did not clearly state) that the gains would be rolled over along with the contribution. If you are correct, than the gains associated to the after tax contributions would go with the TIRA and later would be taxed as regular income. Not sure this is worth it.TomatoTomahto wrote:Tx_turtle, the way I understand it, you rollover the post-tax CONTRIBUTION to a Roth IRA and the total of pre-tax contributions and gains (from pre and post-tax) to a tIRA.
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Re: IRS Relents! Notice 2014-54 permits Basis Isolation
Yes, I was disappointed about that also. Nobody pointed that out in my thread about this rule (http://www.bogleheads.org/forum/viewtop ... 1&t=147844), but kitces states it in the comments to his blog.TX_TURTLE wrote:Good point. I meant to imply (but did not clearly state) that the gains would be rolled over along with the contribution. If you are correct, than the gains associated to the after tax contributions would go with the TIRA and later would be taxed as regular income. Not sure this is worth it.TomatoTomahto wrote:Tx_turtle, the way I understand it, you rollover the post-tax CONTRIBUTION to a Roth IRA and the total of pre-tax contributions and gains (from pre and post-tax) to a tIRA.
I get the FI part but not the RE part of FIRE.
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Re: IRS Relents! Notice 2014-54 permits Basis Isolation
Tx_Turtle,
http://www.kitces.com/blog/irs-notice-2014-54-acquiesces-on-splitting-after-tax-401k-contributions-for-roth-conversion/ wrote:As far as the tax rules are concerned, the $20k of after-tax is the actual after-tax CONTRIBUTIONS. The other $80k will be some combination of pre-tax CONTRIBUTIONS, the GROWTH on the pre-tax contributions, and the GROWTH on the after-tax contributions. It doesn't matter. All of those are "pre-tax"/taxable amounts when they come out of the account, subject to the same rules. The only amount treated as "after-tax" is literally the actual amount of after-tax CONTRIBUTION dollars themselves.
I get the FI part but not the RE part of FIRE.
Re: IRS Relents! Notice 2014-54 permits Basis Isolation
I have 9 source accounts in my 401k regarding contributions and earnings.
2015 will be interesting.
2015 will be interesting.
"..the cavalry ain't comin' kid, you're on your own..."
Re: IRS Relents! Notice 2014-54 permits Basis Isolation
Agree.TomatoTomahto wrote:Tx_turtle, the way I understand it, you rollover the post-tax CONTRIBUTION to a Roth IRA and the total of pre-tax contributions and gains (from pre and post-tax) to a tIRA.
When requesting this specify "after tax balance in the plan" for the Roth and "pre tax balance in the plan" for the TIRA. Do not just provide dollar amounts or you might end up with a 1099R with some taxes due. Be very specific in requesting distributions exclusively from the sub account and do not assume anything. In the end if you mess up you can recharacterize the Roth rollovers to a TIRA to avoid taxes for a botched rollover, but once in the TIRA you cannot isolate basis unless you roll the pre tax TIRA balance back into the employer plan, and then convert the IRA basis remaining.
The sooner you can do a rollover of the after tax contributions in a sub account, there will be more gains generated in the Roth IRA vs in the 401k plan. Of course, plans differ on when and how often you can do these rollovers, so you may be forced to wait until separation in some cases. You are more likely to have a plan with the broader options of a sub account and use of the sub account in larger plans with more higher paid employees than smaller firms without higher paid employees. The recent IRS Notice may also provide incentives for some plans to adopt plan changes to accommodate the isolation of basis opportunities.
Also, plans that do offer the after tax sub account may well limit contributions to be sure no one goes over the annual additions limit of 52k. That limit includes employer matching, as well as elective deferrals and forfeitures. Forfeiture amounts are not predictable, so plans will often want to limit the after tax amount to something that has no chance of getting over the 52k at the end of the plan year.
Finally, note that the IRS Notice not only opens up basis opportunities for employees, it also provides the same benefits for their beneficiaries. Since 2008 when direct Roth rollovers began and with non spouse 401k beneficiaries being able to convert to an inherited Roth IRA, non spouse beneficiaries can now do direct rollovers of their inherited basis to inherited Roth IRAs. Spousal beneficiaries can do the direct rollovers to their own Roth IRAs with no RMDs due for the rest of their life on these Roths.
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Re: IRS Relents! Notice 2014-54 permits Basis Isolation
Is this something that one can reasonably expect a Vanguard Concierge to handle correctly?
I get the FI part but not the RE part of FIRE.
Re: IRS Relents! Notice 2014-54 permits Basis Isolation
I would hope so, but the IRS Notice has only been out a matter of days. Plans may take time to adjust their instructions, and do some training. As a plan administrator, VG must adhere to the variations in all the plans they service, so if VG receives clear instructions from a given plan they can act faster than if the plan drags their feet or if the plan document is less than clear. Some plans may choose to modify the provisions, and that will take more time, often not effective until the following plan year.
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Re: IRS Relents! Notice 2014-54 permits Basis Isolation
The actual contribution and rollover never was (or at least was no more than now) only the split rollover technique and that's what's been codified.Lynette wrote:Thanks Alan, I don't have an after-tax contributions sub account at the moment. Until this ruling, I thought it was a gray area and so I avoided it.
Re: IRS Relents! Notice 2014-54 permits Basis Isolation
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Last edited by Lynette on Wed Dec 06, 2017 7:27 am, edited 1 time in total.
Re: IRS Relents! Notice 2014-54 permits Basis Isolation
The employee does not create the separate accounts. It is a record keeping decision exercised by the employer.TX_TURTLE wrote:I work for a large company, that over the years has changed 401K provider multiple times. I don't recall having seen the option for creating different 'sub accounts'.
I don't think you are missing anything. But if your employer allows in-service rollovers, if you do rollovers more frequently and if you just roll everything to Roth, you'll end up with more in Roth. If you do rollovers a couple of times a year, there might not be much in earnings to be taxed.Based on these latest news, I'm about to begin making after tax contributions to the extent allowed by the IRS: <After tax contribution> = 52,000 - (17,500 + <Company match>). Once I qualify (I change job or retire), I will simply roll over (simultaneously) the pre-tax contributions to a TIRA and the after tax contributions to a Roth IRA . This will not trigger any tax liability. Am I missing something?
Even if you didn't send it all to Roth, you'd be getting the money into Roth sooner, resulting in more money in Roth.
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Re: IRS Relents! Notice 2014-54 permits Basis Isolation
It may not be worth it because it is just like a non-deductible contribution to tIRA - the income is taxed as regular income instead of capital gains. If you are going to leave this money lying there, it would have been better to put it in taxable instead.TX_TURTLE wrote:Good point. I meant to imply (but did not clearly state) that the gains would be rolled over along with the contribution. If you are correct, than the gains associated to the after tax contributions would go with the TIRA and later would be taxed as regular income. Not sure this is worth it.TomatoTomahto wrote:Tx_turtle, the way I understand it, you rollover the post-tax CONTRIBUTION to a Roth IRA and the total of pre-tax contributions and gains (from pre and post-tax) to a tIRA.
That is why many people have decided not to use the after-tax to Roth method unless the employer allows in-service rollovers of the after-tax sub account.
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Re: IRS Relents! Notice 2014-54 permits Basis Isolation
The gains would be taxed as ordinary income regardless either in the 401k later or in a TIRA later or if desired rolled into the Roth and paid immediately.TX_TURTLE wrote:Good point. I meant to imply (but did not clearly state) that the gains would be rolled over along with the contribution. If you are correct, than the gains associated to the after tax contributions would go with the TIRA and later would be taxed as regular income. Not sure this is worth it.
Re: IRS Relents! Notice 2014-54 permits Basis Isolation
Correct. But if the money had gone to taxable in the first place, instead of into the after-tax account, the gains would be taxed at capital gains rates.placeholder wrote:The gains would be taxed as ordinary income regardless either in the 401k later or in a TIRA later or if desired rolled into the Roth and paid immediately.TX_TURTLE wrote:Good point. I meant to imply (but did not clearly state) that the gains would be rolled over along with the contribution. If you are correct, than the gains associated to the after tax contributions would go with the TIRA and later would be taxed as regular income. Not sure this is worth it.
This is quite a benefit for stocks. For bonds, not so much since the income from bonds is mostly dividends (along with a little in capital gains) and bond dividends are taxed at the ordinary rates instead of the lower capital gains rates.
That is what I took the TX_TURTLE post to mean. But I could be wrong.
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Re: IRS Relents! Notice 2014-54 permits Basis Isolation
I am currently still working and under 59 1/2 and would like to convert my 401(k) after tax contributions and the gains per 2014-54. My 401(k) allows for the distribution of after tax contributions while still employed. Of course if I take these amounts and put in my pocket then I'll have to pay tax and 10% penalty on the gains.
However, if I understand the notice, I can instruct my 401(k) administrator to roll-over the after-tax contributions directly to a Roth IRA and the proceeds on these contributions directly to a traditional IRA and not have to pay taxes and penalties. Is this correct? Thanks.
However, if I understand the notice, I can instruct my 401(k) administrator to roll-over the after-tax contributions directly to a Roth IRA and the proceeds on these contributions directly to a traditional IRA and not have to pay taxes and penalties. Is this correct? Thanks.
Re: IRS Relents! Notice 2014-54 permits Basis Isolation
Yes, it is correct.
However, there may be a delay due to the time required for the plan to digest the IRS Notice. The Notice is not mandatory for plans until 1/1/2015, but I think most plans should be able to act now, and there is no question that the IRS will be OK with it. If your plan balks because they think this cannot be done as a single distribution, if they read the Notice carefully, they will see that they can actually make separate distributions to the different destination accounts and combined they will still be treated as a single distribution since you requested them together. Either way, they are required to offer this come January.
However, there may be a delay due to the time required for the plan to digest the IRS Notice. The Notice is not mandatory for plans until 1/1/2015, but I think most plans should be able to act now, and there is no question that the IRS will be OK with it. If your plan balks because they think this cannot be done as a single distribution, if they read the Notice carefully, they will see that they can actually make separate distributions to the different destination accounts and combined they will still be treated as a single distribution since you requested them together. Either way, they are required to offer this come January.
Re: IRS Relents! Notice 2014-54 permits Basis Isolation
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Last edited by Lynette on Sat Jan 12, 2019 3:09 am, edited 1 time in total.
Re: IRS Relents! Notice 2014-54 permits Basis Isolation
Thanks for the replies and information.
I'm glad to see that I can do these dual conversions without tax consequences.
Much more valuable than a TIRA to Roth conversion.
I'm glad to see that I can do these dual conversions without tax consequences.
Much more valuable than a TIRA to Roth conversion.
Re: IRS Relents! Notice 2014-54 permits Basis Isolation
dillrob, note that if you do have them split the distribution into tIRA and Roth IRA, the presence of the tIRA will interfere with your ability to do back door contributions to Roth IRA. Is that an issue for you?
It is an issue for some people who want to do both things (after-tax rolled into Roth and back door contribution to Roth IRA).
It is an issue for some people who want to do both things (after-tax rolled into Roth and back door contribution to Roth IRA).
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Re: IRS Relents! Notice 2014-54 permits Basis Isolation
I removed a few off-topic comments. Please stay on-topic.
Re: IRS Relents! Notice 2014-54 permits Basis Isolation
I agree. I am considering a distribution from my 401k plan that would be similarly split. However, it is also important to understand that the Roth conversion calculation is done on end-of-year values, thus if I took the 401k rollover in December 2014 then my January 2014 backdoor Roth would be largely taxable (ouch!).retiredjg wrote:dillrob, note that if you do have them split the distribution into tIRA and Roth IRA, the presence of the tIRA will interfere with your ability to do back door contributions to Roth IRA. Is that an issue for you?
It is an issue for some people who want to do both things (after-tax rolled into Roth and back door contribution to Roth IRA).
However, I feel that the ability to move a sizable amount of after-tax money directly into a Roth is valuable and can outweigh the inability to make tax-free backdoor Roth contributions in future years. So I am aiming to take the distribution in January 2015. Do you see it similarly?
Best wishes.
Andy
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Re: IRS Relents! Notice 2014-54 permits Basis Isolation
Wagnerjb wrote:I agree. I am considering a distribution from my 401k plan that would be similarly split. However, it is also important to understand that the Roth conversion calculation is done on end-of-year values, thus if I took the 401k rollover in December 2014 then my January 2014 backdoor Roth would be largely taxable (ouch!).retiredjg wrote:dillrob, note that if you do have them split the distribution into tIRA and Roth IRA, the presence of the tIRA will interfere with your ability to do back door contributions to Roth IRA. Is that an issue for you?
It is an issue for some people who want to do both things (after-tax rolled into Roth and back door contribution to Roth IRA).
However, I feel that the ability to move a sizable amount of after-tax money directly into a Roth is valuable and can outweigh the inability to make tax-free backdoor Roth contributions in future years. So I am aiming to take the distribution in January 2015. Do you see it similarly?
Best wishes.
Am I understanding this correctly? If an individual made a back-door Roth contribution for the 2014 tax year and had after-tax contributions made to a 401k plan that also had an after-tax earnings component attached to it, then requesting an in-service distribution of the after-tax earnings would disallow the "back-door Roth
contribution"? For example, a $5,500 back door contribution for 2014 tax year was made in January 2014, on November 3rd 2014, the individual requested an in-service distribution from 401k plan totaling $6K; $5K after-tax contribution plus $1K of after-tax earnings associated with the after-tax contributions. What is the net effect of that? Would that prohibit $1K of "back-door" Roth contribution from being allowed on Form 8606 because the IRS would consider it to be $1K more than what is currently permitted for folks under age of 50?
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Re: IRS Relents! Notice 2014-54 permits Basis Isolation
You can always try to find some qualified plan to roll the TIRA into to clear the way for backdoor Roth.
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Re: IRS Relents! Notice 2014-54 permits Basis Isolation
No but the rollover IRA would participate in the pro rata calculation during conversion so most like to get rid of those.Grt2bOutdoors wrote:Am I understanding this correctly? If an individual made a back-door Roth contribution for the 2014 tax year and had after-tax contributions made to a 401k plan that also had an after-tax earnings component attached to it, then requesting an in-service distribution of the after-tax earnings would disallow the "back-door Roth
contribution"?
Re: IRS Relents! Notice 2014-54 permits Basis Isolation
As Placeholder has already explained, the Roth conversion wouldn't be disallowed. But if you had nothing in your TIRA on January 1st then the contribution and immediate conversion to a Roth (the backdoor Roth) would not generate any tax liability. However, if you rolled over a balance from your 401k to your TIRA in December of the same year, your Roth conversion would be a prorata calculation....undoubtedly resulting in a tax liability.Grt2bOutdoors wrote:Am I understanding this correctly? If an individual made a back-door Roth contribution for the 2014 tax year and had after-tax contributions made to a 401k plan that also had an after-tax earnings component attached to it, then requesting an in-service distribution of the after-tax earnings would disallow the "back-door Roth
contribution"?
Best wishes.
Andy
Re: IRS Relents! Notice 2014-54 permits Basis Isolation
What I meant is this.Grt2bOutdoors wrote:Wagnerjb wrote:I agree. I am considering a distribution from my 401k plan that would be similarly split. However, it is also important to understand that the Roth conversion calculation is done on end-of-year values, thus if I took the 401k rollover in December 2014 then my January 2014 backdoor Roth would be largely taxable (ouch!).retiredjg wrote:dillrob, note that if you do have them split the distribution into tIRA and Roth IRA, the presence of the tIRA will interfere with your ability to do back door contributions to Roth IRA. Is that an issue for you?
It is an issue for some people who want to do both things (after-tax rolled into Roth and back door contribution to Roth IRA).
However, I feel that the ability to move a sizable amount of after-tax money directly into a Roth is valuable and can outweigh the inability to make tax-free backdoor Roth contributions in future years. So I am aiming to take the distribution in January 2015. Do you see it similarly?
Best wishes.
Am I understanding this correctly? If an individual made a back-door Roth contribution for the 2014 tax year and had after-tax contributions made to a 401k plan that also had an after-tax earnings component attached to it, then requesting an in-service distribution of the after-tax earnings would disallow the "back-door Roth
contribution"? For example, a $5,500 back door contribution for 2014 tax year was made in January 2014, on November 3rd 2014, the individual requested an in-service distribution from 401k plan totaling $6K; $5K after-tax contribution plus $1K of after-tax earnings associated with the after-tax contributions. What is the net effect of that? Would that prohibit $1K of "back-door" Roth contribution from being allowed on Form 8606 because the IRS would consider it to be $1K more than what is currently permitted for folks under age of 50?
If a person chooses to roll out his after-tax account (including earnings) and chooses to have the pre-tax money go to tIRA and the after tax money go to Roth....the presence of any pre-tax money in tIRA on 12/31/14 would mess up any back door contribution/conversion performed in 2014 and also in any future years. By "mess up" I mean the new tIRA would have to be pro-rated with any conversion that happened in that calendar year.
On the other hand, if the person rolled his after-tax account (including earnings) all into Roth IRA (and pay tax on the earnings part), there would be no tIRA on 12/31/14 to mess up any contribution/conversion performed in 2014 or in future years.
Did that help?
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Re: IRS Relents! Notice 2014-54 permits Basis Isolation
If you simply pay tax on the earnings part of the after-tax "rollover" to Roth IRA, you can do both the ordinary back door contribution to Roth IRA and the after-tax rollover to Roth IRA. Edit: or find a 401k plan to roll that tIRA into before 12/31. You can even roll it back into the 401k you just took it from.Wagnerjb wrote:I agree. I am considering a distribution from my 401k plan that would be similarly split. However, it is also important to understand that the Roth conversion calculation is done on end-of-year values, thus if I took the 401k rollover in December 2014 then my January 2014 backdoor Roth would be largely taxable (ouch!).retiredjg wrote:dillrob, note that if you do have them split the distribution into tIRA and Roth IRA, the presence of the tIRA will interfere with your ability to do back door contributions to Roth IRA. Is that an issue for you?
It is an issue for some people who want to do both things (after-tax rolled into Roth and back door contribution to Roth IRA).
However, I feel that the ability to move a sizable amount of after-tax money directly into a Roth is valuable and can outweigh the inability to make tax-free backdoor Roth contributions in future years. So I am aiming to take the distribution in January 2015. Do you see it similarly?
Best wishes.
Changing you distribution to January 2015 just moves the "problem" into the next year. Or maybe I didn't understand what you mean.
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Re: IRS Relents! Notice 2014-54 permits Basis Isolation
Question for Alan.
A few years ago I rolled over two of my 401K plans into a Rollover IRA at Fidelity. The 401K plans were also with Fidelity ,and had after-tax contributions as well.
Last year when I rolled a 401K plan into a Rollover IRA, they had me open a ROTH IRA and rolled over my after-tax contributions to a ROTH which is great.
When I called Fidelity about my old plans that I had rolled over into the Rollover IRA (first paragraph above), they still have the pre-tax and after-tax info on the 401K plans (although I am out of them completely). However, the distinction is lost in the Rollover IRA (the entire amount shows as pre-tax). I was told that I should keep track of my pre-tax and after-tax components and they asked me to see a tax advisor. This is not acceptable to me and I think that Fidelity should re-characterise the after-tax amounts and roll the after-tax from my rollover IRA into a newly created ROTH IRA. Does anybody have experience with this? Suggestions, please.
A few years ago I rolled over two of my 401K plans into a Rollover IRA at Fidelity. The 401K plans were also with Fidelity ,and had after-tax contributions as well.
Last year when I rolled a 401K plan into a Rollover IRA, they had me open a ROTH IRA and rolled over my after-tax contributions to a ROTH which is great.
When I called Fidelity about my old plans that I had rolled over into the Rollover IRA (first paragraph above), they still have the pre-tax and after-tax info on the 401K plans (although I am out of them completely). However, the distinction is lost in the Rollover IRA (the entire amount shows as pre-tax). I was told that I should keep track of my pre-tax and after-tax components and they asked me to see a tax advisor. This is not acceptable to me and I think that Fidelity should re-characterise the after-tax amounts and roll the after-tax from my rollover IRA into a newly created ROTH IRA. Does anybody have experience with this? Suggestions, please.
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Re: IRS Relents! Notice 2014-54 permits Basis Isolation
There's nothing you can do at this point if the original rollover wasn't split other than to roll the taxable portion to another 401k or similar plan.
Re: IRS Relents! Notice 2014-54 permits Basis Isolation
Once after tax contributions are rolled into a TIRA (not possible before 2002), the basis cannot be removed from the TIRA without a distribution including a conversion. Rolling the pre tax IRA balance into an employer plan would enable remaining TIRA basis to be converted tax free, BUT ONLY if you have documented that basis on Form 8606.
Unlike non deductible TIRA contributions which must be reported on the current year 8606, the IRS instructions for after tax contributions rolled into a TIRA indicate that the 8606 is not to be filed until it would OTHERWISE be required. It would otherwise be required the first year you either made a non deductible contribution or took a distribution.
This effectively means that the few people who actually rolled over after tax amounts instead of cashing them in need to make a note to themselves to remember to update that 8606 later. This is a poorly thought out rule by the IRS because many people cannot even remember to file a current 8606 for non deductible contributions. That said, you can still document your basis before you need to utilize it by adding it to line 2 of your next 8606. You can tell what the amount of basis rolled over by checking your 1099R for those years, and looking at Box 5. Or if you were paid the after tax amounts and did your own 60 day rollover, you would have received a separate 1099R showing nothing in Box 2a.
Unlike non deductible TIRA contributions which must be reported on the current year 8606, the IRS instructions for after tax contributions rolled into a TIRA indicate that the 8606 is not to be filed until it would OTHERWISE be required. It would otherwise be required the first year you either made a non deductible contribution or took a distribution.
This effectively means that the few people who actually rolled over after tax amounts instead of cashing them in need to make a note to themselves to remember to update that 8606 later. This is a poorly thought out rule by the IRS because many people cannot even remember to file a current 8606 for non deductible contributions. That said, you can still document your basis before you need to utilize it by adding it to line 2 of your next 8606. You can tell what the amount of basis rolled over by checking your 1099R for those years, and looking at Box 5. Or if you were paid the after tax amounts and did your own 60 day rollover, you would have received a separate 1099R showing nothing in Box 2a.
Re: IRS Relents! Notice 2014-54 permits Basis Isolation
We are on the same page. However, I am about to retire in early 2015 and my tax rate in 2014 is high....and will be insane in 2015 when I vest in RSUs and get a taxable pension lump sum distribution. So I am reluctant to take any voluntary tax hit in those two years. Since I am retiring, I won't be able to fund any type of IRA in the future, so shutting myself off from the backdoor Roth isn't an issue. By rolling over the 401k plan in early 2015 I get the aftertax money into the Roth sooner and I only forfeit one year of the backdoor Roth.retiredjg wrote:If you simply pay tax on the earnings part of the after-tax "rollover" to Roth IRA, you can do both the ordinary back door contribution to Roth IRA and the after-tax rollover to Roth IRA. Edit: or find a 401k plan to roll that tIRA into before 12/31. You can even roll it back into the 401k you just took it from.
Changing you distribution to January 2015 just moves the "problem" into the next year. Or maybe I didn't understand what you mean.
In 2016 I will be in the sweet spot for taxes....retired, but neither drawing SS nor taking RMDs yet. I wil be in a low tax bracket and will be converting some pretax money to a Roth up to the top end of one of the lower tax brackets.
Best wishes.
Andy
Re: IRS Relents! Notice 2014-54 permits Basis Isolation
Thanks for the additional information. I have been contributing to tIRA for some time and do not plan to convert the tIRA via a back-door Roth. The tax hit would be too much. So, since I do not have to worry about a subsequent tIRA to Roth back door conversion there should be no impediment (i.e., no tax hit) to me converting my after tax 401k contributions to a Roth and the proceeds on these contributions to a tIRA per notice 2014-54. I plan to do it as soon as my plan permits and yearly thereafter. I wonder why the Feds just don't remove the Roth income limit when they permit such lucrative loopholes? Makes no sense.retiredjg wrote:dillrob, note that if you do have them split the distribution into tIRA and Roth IRA, the presence of the tIRA will interfere with your ability to do back door contributions to Roth IRA. Is that an issue for you?
It is an issue for some people who want to do both things (after-tax rolled into Roth and back door contribution to Roth IRA).
Re: IRS Relents! Notice 2014-54 permits Basis Isolation
If I understand Fairmark correctly, this is no help for IRAs.
But there is an older method that may work: aggregate, roll all pretax IRA $ into a 401k, convert the posttax to Roth.
http://fairmark.com/wp-content/uploads/ ... -basis.gif
http://fairmark.com/retirement/roth-acc ... ira-basis/
But there is an older method that may work: aggregate, roll all pretax IRA $ into a 401k, convert the posttax to Roth.
http://fairmark.com/wp-content/uploads/ ... -basis.gif
http://fairmark.com/retirement/roth-acc ... ira-basis/
Re: IRS Relents! Notice 2014-54 permits Basis Isolation
I was reading some additional material on this topic and I think I may be incorrect in my conclusions regarding 2014-54. I would like your input to help determine if I understand the implications of this notice.
Assuming I have a total 401(k) balance of $1,000,000 that is comprised of $250k after tax contributions, $50k proceeds (untaxed) on the after tax contributions, and $700k of pre-tax contributions and proceeds on these pre-tax contributions (again untaxed) can I:
1. convert only the $250k after tax contribution into a rIRA without having to do any pro-ration? [I don't think 2014-54 permits this];
2. convert the $250k of after tax contribution into a rIRA and the $50k proceeds into a tIRA without any consideration of or pro-ration based on the other pre-tax funds ; or
3. have to pro-rate any withdraw based on the entire ratio of after tax funds to untaxed funds such that I either have to convert the entire account ($250k into rIRA and remaining $750k into tIRA) or if I withdraw $200k then only $50k can go into a rIRA and the remaining $150k into a tIRA.
Your input is greatly appreciated. Thanks.
Assuming I have a total 401(k) balance of $1,000,000 that is comprised of $250k after tax contributions, $50k proceeds (untaxed) on the after tax contributions, and $700k of pre-tax contributions and proceeds on these pre-tax contributions (again untaxed) can I:
1. convert only the $250k after tax contribution into a rIRA without having to do any pro-ration? [I don't think 2014-54 permits this];
2. convert the $250k of after tax contribution into a rIRA and the $50k proceeds into a tIRA without any consideration of or pro-ration based on the other pre-tax funds ; or
3. have to pro-rate any withdraw based on the entire ratio of after tax funds to untaxed funds such that I either have to convert the entire account ($250k into rIRA and remaining $750k into tIRA) or if I withdraw $200k then only $50k can go into a rIRA and the remaining $150k into a tIRA.
Your input is greatly appreciated. Thanks.
Re: IRS Relents! Notice 2014-54 permits Basis Isolation
I am not the authority on this, but I am going to answer in the way I understand it.
IF:
1) Your plan has a separate "sub account" for after tax contributions (NOT ROTH contributions)
2) Your plan allows for "in service withdrawals" before separation and before age 59.5
Then:
You can request from your plan (2) checks for the after tax portion (in your example, the $300k, $250k of already taxed contributions, and $50k of not yet taxed earnings on these contributions. One check (the 250k of your contributions) can go directly to a ROTH IRA, the second check ($50k of earnings on the after tax balance), can be depostited in a tIRA. If you want to do backdoor ROTHs as well, you should see if your plan will allow you to roll the tIRA back into your 401k plan to avoid the pro rata rules.
What the notice (2014-54) allows for, is the plan to actually cut these 2 separate checks. Before this, there were hoops to jump through to isolate the basis to get the exact same thing done as above. In my opinion, this notice seems to also "bless" this transaction which people have already been doing, but it appeared to be a bit of a gray area as the IRS never really said it was legal before, they were very quiet on the subject.
Also,just to be clear, doing this should not trigger any taxable event. there is no pro-rata issue with the existing pre-tax funds which remain in your 401k plan (this was the gray area). If there was a pro-rata issue, this would likely not be worth doing.
There are a few things to consider:
1) How often does your plan allow for "in service" distributions? Mine allows for 1 a year. You probably want to do this as often as the plan will allow to limit any earnings.
2) Depending on your investment elections, the earnings on the after tax subaccount may be very small, and not worth the extra effort to roll back into your employers 401k plan.
For myself, I will do my first in service withdrawal about this time next year. If the earnings are very small, I may simply just cash the check for the earnings (I don't believe there is anything keeping me from doing this) and pay the tax and i believe a 10% penalty as well instead of going through the hassle to roll it back into my plan. You can also pay the taxes on the earnings and put it into your ROTH IRA. Paying the tax on the earnings and putting them into your ROTH IRA somewhat complicates withdrawals before age 59.5, as I understand it,due to ordering rules about how funds come out of a ROTH IRA. I do not want to have to track this, so I will only put my contributions into the ROTH.
Alans, and others, do I understand correctly?
IF:
1) Your plan has a separate "sub account" for after tax contributions (NOT ROTH contributions)
2) Your plan allows for "in service withdrawals" before separation and before age 59.5
Then:
You can request from your plan (2) checks for the after tax portion (in your example, the $300k, $250k of already taxed contributions, and $50k of not yet taxed earnings on these contributions. One check (the 250k of your contributions) can go directly to a ROTH IRA, the second check ($50k of earnings on the after tax balance), can be depostited in a tIRA. If you want to do backdoor ROTHs as well, you should see if your plan will allow you to roll the tIRA back into your 401k plan to avoid the pro rata rules.
What the notice (2014-54) allows for, is the plan to actually cut these 2 separate checks. Before this, there were hoops to jump through to isolate the basis to get the exact same thing done as above. In my opinion, this notice seems to also "bless" this transaction which people have already been doing, but it appeared to be a bit of a gray area as the IRS never really said it was legal before, they were very quiet on the subject.
Also,just to be clear, doing this should not trigger any taxable event. there is no pro-rata issue with the existing pre-tax funds which remain in your 401k plan (this was the gray area). If there was a pro-rata issue, this would likely not be worth doing.
There are a few things to consider:
1) How often does your plan allow for "in service" distributions? Mine allows for 1 a year. You probably want to do this as often as the plan will allow to limit any earnings.
2) Depending on your investment elections, the earnings on the after tax subaccount may be very small, and not worth the extra effort to roll back into your employers 401k plan.
For myself, I will do my first in service withdrawal about this time next year. If the earnings are very small, I may simply just cash the check for the earnings (I don't believe there is anything keeping me from doing this) and pay the tax and i believe a 10% penalty as well instead of going through the hassle to roll it back into my plan. You can also pay the taxes on the earnings and put it into your ROTH IRA. Paying the tax on the earnings and putting them into your ROTH IRA somewhat complicates withdrawals before age 59.5, as I understand it,due to ordering rules about how funds come out of a ROTH IRA. I do not want to have to track this, so I will only put my contributions into the ROTH.
Alans, and others, do I understand correctly?
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Re: IRS Relents! Notice 2014-54 permits Basis Isolation
Convert is not really the word you want here - this is a rollover or a transfer. But no, if you are allowed to take the $250k out you MUST take the earnings from that $250k as well. You have a choice on where to send the earnings though. The earnings can go to tIRA (no taxes due) or to Roth IRA (taxes due next tax season).dillrob wrote:1. convert only the $250k after tax contribution into a rIRA without having to do any pro-ration? [I don't think 2014-54 permits this];
2. convert the $250k of after tax contribution into a rIRA and the $50k proceeds into a tIRA without any consideration of or pro-ration based on the other pre-tax funds ; or
Yes, if your plan has the aftertax money and its earnings in a separate sub-account (some people call this a separate contract).
If your after-tax money and its earnings are not accounted for separately I'm not sure you can even do the rollover. But if you can, I don't think you'd want to because other money in the 401k would get pro-rated.
3. have to pro-rate any withdraw based on the entire ratio of after tax funds to untaxed funds such that I either have to convert the entire account ($250k into rIRA and remaining $750k into tIRA) or if I withdraw $200k then only $50k can go into a rIRA and the remaining $150k into a tIRA.
I'm not entirely sure I followed your question. But if the other $750k gets pro-rated you would not want to do this rollover in the first place.
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Re: IRS Relents! Notice 2014-54 permits Basis Isolation
I think you understand it correctly.panhead wrote:Alans, and others, do I understand correctly?
I think it might be a mistake to cash in the earnings, pay the tax and the 10% penalty though. The longest you'd have to keep up with the information is 5 years (for each conversion). Is that more than you want to do?
Or why not just leave it in tIRA? If you also want to use the back door contribution to Roth IRA, I understand why you don't want to leave it in tIRA. But you might be able to get everything you want into Roth through the "mega back door" route of 401k after-tax sub-account rollover to Roth.
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Re: IRS Relents! Notice 2014-54 permits Basis Isolation
Thank you for the prompt replies and clarification.
To address the questions, my 401(k) does account for the after-tax contributions and proceeds separately, and does permit an in-service withdraw.
Based on the replies, scenario 2 (after tax contributions transferred to a rIRA and untaxed proceeds on these contributions transferred to a tIRA) is permissible and is a great solution for me. I will do this as soon as soon as my 401(k) custodian permits. Presumably this will be in January.
A couple articles I read confused me and led me to believe that only a pro-rata amount of my after tax contributions (based on my total account balance) could be transferred to a rIRA. Per your advice, this is not the case.
Thanks and best regards.
Bob
To address the questions, my 401(k) does account for the after-tax contributions and proceeds separately, and does permit an in-service withdraw.
Based on the replies, scenario 2 (after tax contributions transferred to a rIRA and untaxed proceeds on these contributions transferred to a tIRA) is permissible and is a great solution for me. I will do this as soon as soon as my 401(k) custodian permits. Presumably this will be in January.
A couple articles I read confused me and led me to believe that only a pro-rata amount of my after tax contributions (based on my total account balance) could be transferred to a rIRA. Per your advice, this is not the case.
Thanks and best regards.
Bob
Re: IRS Relents! Notice 2014-54 permits Basis Isolation
This is a good point. I need to further research the implications of putting the earnings in the ROTH and then taking withdrawals before I'm 59.5. Also, if the earnings are substantial, I would go through the trouble to roll the tIRA back into the 401k so as to continue to avoid paying tax at this point. Your other point is one which I've been considering. With the ability to put so much into a ROTH via the mega backdoor method, I'm not sure it still makes sense for me to keep doing the backdoor roth as well. I need to think about this.retiredjg wrote:I think you understand it correctly.panhead wrote:Alans, and others, do I understand correctly?
I think it might be a mistake to cash in the earnings, pay the tax and the 10% penalty though. The longest you'd have to keep up with the information is 5 years (for each conversion). Is that more than you want to do?
Or why not just leave it in tIRA? If you also want to use the back door contribution to Roth IRA, I understand why you don't want to leave it in tIRA. But you might be able to get everything you want into Roth through the "mega back door" route of 401k after-tax sub-account rollover to Roth.
Re: IRS Relents! Notice 2014-54 permits Basis Isolation
What you are trying to avoid is keeping up with the paperwork till you are 59.5. But you will need to keep up with it anyway. Here's why.panhead wrote:This is a good point. I need to further research the implications of putting the earnings in the ROTH and then taking withdrawals before I'm 59.5.
If you don't keep a running total of your direct contributions (if any) and each rollover from after-tax 401k to Roth IRA, you won't know how much you can take out in an emergency before you hit the bottom rung - the earnings. If you aren't familiar with the ordering rules for taking money out of Roth IRA, what I just said may not make sense. Do you know those rules or where to find them?
If you have to keep up with each rollover anyway, it is really no extra trouble to keep up with how much was was pre-tax and how much was after-tax when the rollover occurred.
Maybe you could arrange it so that it can all happen.Also, if the earnings are substantial, I would go through the trouble to roll the tIRA back into the 401k so as to continue to avoid paying tax at this point. Your other point is one which I've been considering. With the ability to put so much into a ROTH via the mega backdoor method, I'm not sure it still makes sense for me to keep doing the backdoor roth as well. I need to think about this.
You could roll the tIRA back into the 401k every other year. Do your back door contribution to Roth IRA (even two years worth) in a year when you'll have $0 in tIRA on 12/31.
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Re: IRS Relents! Notice 2014-54 permits Basis Isolation
I didn't read the whole thread yet, but I'm concerned about this.
A few years ago I was working for an employer that allowed after-tax 401k contributions and in-service rollovers.
I did some after-tax contributions in 2010.
I withdrew them in early 2011 to rollover to my Roth IRA.
I paid tax on associated earnings that were withdrawn at that time.
I continued to make after-tax contributions in 2011.
Then in the summer of 2011, I got laid off. There was a big severance package and a lot of it went to after-tax 401k.
In January 2012, I did basis isolation.
The pretax amounts, including contribution, match and earnings, were rolled over to a traditional IRA at Vanguard.
The after-tax contributions were rolled over to a Roth IRA also at Vanguard. I believe I also had to pay tax on the associated earnings at that time, but can't remember exactly now.
I received 1099-R both in 2011 and 2012 and the after-tax contributions were non-taxable on them.
My question is, in the long run, how and where am I supposed to track the Roth IRA basis for those after-tax contributions that were rolled over ?
Form 8606 and Quicken for tax years 2011/2012 didn't have any instructions on where to track this type of rollover in the basis.
They only tracked direct Roth IRA contributions, and Traditional IRA conversion contributions. (maybe rollovers from Roth 401k as well)
But there was no mention of after-401k rollover contributions.
Is 8606 and the associated instructions going to be updated for next year to account for these after-tax contribution rollovers?
Should I file amended forms 8606 for the last 3 years to correct the Roth IRA basis ?
These after-tax contributions are about $50k as I recall whereas the total amount in my Roth IRA is $115k, so this is quite significant.
I do my taxes myself with Quicken and would prefer to continue doing them that way.
I don't plan on making any short-term withdrawals from the Roth IRA, but there is always the possibility that I may do so eventually before age 59 1/2. In that case, I wouldn't want to have to pay taxes on the amount again. I may take SEPP withdrawals from this Roth IRA if/when I retire early.
A few years ago I was working for an employer that allowed after-tax 401k contributions and in-service rollovers.
I did some after-tax contributions in 2010.
I withdrew them in early 2011 to rollover to my Roth IRA.
I paid tax on associated earnings that were withdrawn at that time.
I continued to make after-tax contributions in 2011.
Then in the summer of 2011, I got laid off. There was a big severance package and a lot of it went to after-tax 401k.
In January 2012, I did basis isolation.
The pretax amounts, including contribution, match and earnings, were rolled over to a traditional IRA at Vanguard.
The after-tax contributions were rolled over to a Roth IRA also at Vanguard. I believe I also had to pay tax on the associated earnings at that time, but can't remember exactly now.
I received 1099-R both in 2011 and 2012 and the after-tax contributions were non-taxable on them.
My question is, in the long run, how and where am I supposed to track the Roth IRA basis for those after-tax contributions that were rolled over ?
Form 8606 and Quicken for tax years 2011/2012 didn't have any instructions on where to track this type of rollover in the basis.
They only tracked direct Roth IRA contributions, and Traditional IRA conversion contributions. (maybe rollovers from Roth 401k as well)
But there was no mention of after-401k rollover contributions.
Is 8606 and the associated instructions going to be updated for next year to account for these after-tax contribution rollovers?
Should I file amended forms 8606 for the last 3 years to correct the Roth IRA basis ?
These after-tax contributions are about $50k as I recall whereas the total amount in my Roth IRA is $115k, so this is quite significant.
I do my taxes myself with Quicken and would prefer to continue doing them that way.
I don't plan on making any short-term withdrawals from the Roth IRA, but there is always the possibility that I may do so eventually before age 59 1/2. In that case, I wouldn't want to have to pay taxes on the amount again. I may take SEPP withdrawals from this Roth IRA if/when I retire early.
Re: IRS Relents! Notice 2014-54 permits Basis Isolation
I am trying to make it easier if I desire to do withdrawals before age 59.5. I have a couple direct contributions to a ROTH, and then a couple of backdoor roth conversions. I have a rudimentary understanding of withdrawal rules and have started reading more. I know contributions come first, conversions come second, and as long as the conversions have 'aged' for 5 years (for each contribution) then there is no penalty here either. Rolling over the earnings from the after tax 401k subaccount is where things seem to become more involved. I *think* that these earnings are withdrawn before the rollover conversion, so will be subject to a 10% penalty, and that these earings sit in the withdrawal stack next to each of their corresponding conversions (a graphic would probably help here lol). My thinking was that if I just roll the contributions from the 401k into the ROTH, and keep the earnings out of it, my only concern will be the 5 year 'aging' of the conversion, i won't have to track the earnings. What I would imagine will likely be a small amount of gains (the 401k is all in bonds) my thinking was it will unlikely be worth the extra work at tax time should i desire to withdraw from the ROTH before 59.5.retiredjg wrote:What you are trying to avoid is keeping up with the paperwork till you are 59.5. But you will need to keep up with it anyway. Here's why.panhead wrote:This is a good point. I need to further research the implications of putting the earnings in the ROTH and then taking withdrawals before I'm 59.5.
If you don't keep a running total of your direct contributions (if any) and each rollover from after-tax 401k to Roth IRA, you won't know how much you can take out in an emergency before you hit the bottom rung - the earnings. If you aren't familiar with the ordering rules for taking money out of Roth IRA, what I just said may not make sense. Do you know those rules or where to find them?
If you have to keep up with each rollover anyway, it is really no extra trouble to keep up with how much was was pre-tax and how much was after-tax when the rollover occurred.
Also, if the earnings are substantial, I would go through the trouble to roll the tIRA back into the 401k so as to continue to avoid paying tax at this point. Your other point is one which I've been considering. With the ability to put so much into a ROTH via the mega backdoor method, I'm not sure it still makes sense for me to keep doing the backdoor roth as well. I need to think about this.
Maybe you could arrange it so that it can all happen.
You could roll the tIRA back into the 401k every other year. Do your back door contribution to Roth IRA (even two years worth) in a year when you'll have $0 in tIRA on 12/31.
Does this make sense?
This is why my plan was to roll it back into my companies 401k plan (which it allows for, i contacted them) instead. I don't so much mind the extra paperwork once a year to do this, if it' makes my life easier down the road that I don't have to track the penalty due on earnings which I rolled over years ago.
Hope I'm not hijacking the thread, maybe I should have started one concerning strategies for using the mega back door. But anyhow, that's why I was thinking what I was thinking.
The every other year idea could be a workable strategy, love the way you guys come up with this stuff! I don't plan on doing my conversion till about this time next year,so I've got plenty of time to think about it, but I want to have a plan in place by then so I can execute quickly and understand what I am doing and why.,
Re: IRS Relents! Notice 2014-54 permits Basis Isolation
I think Alan S will have to give the definitive answer, but see if this gets you started.madbrain wrote: My question is, in the long run, how and where am I supposed to track the Roth IRA basis for those after-tax contributions that were rolled over ?
Form 8606 and Quicken for tax years 2011/2012 didn't have any instructions on where to track this type of rollover in the basis.
They only tracked direct Roth IRA contributions, and Traditional IRA conversion contributions. (maybe rollovers from Roth 401k as well)
But there was no mention of after-401k rollover contributions.
Form 8606 (itself) does not track contributions to Roth IRA. It tracks non-deductible contributions to tIRA. But there is a worksheet in the instructions for Form 8606 that I suppose you can use to track basis in Roth IRA. I'm going to guess you do this in Quicken rather than by hand?
There is no direct mention of after-tax 401k rollover contributions, but there is mention of rollovers from a qualified retirement plan. That is what this would be. I'm talking about the worksheet that is used for line 24.
Does that solve your problem?
I doubt it because this is not really something new.Is 8606 and the associated instructions going to be updated for next year to account for these after-tax contribution rollovers?
No because Form 8606 does not track Roth IRA basis.Should I file amended forms 8606 for the last 3 years to correct the Roth IRA basis ?
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Re: IRS Relents! Notice 2014-54 permits Basis Isolation
And if the conversion didn't include any earnings, there would be no penalty even before 5 years. The 5 years only matters for money that was taxed at the conversion/rollover.panhead wrote:I am trying to make it easier if I desire to do withdrawals before age 59.5. I have a couple direct contributions to a ROTH, and then a couple of backdoor roth conversions. I have a rudimentary understanding of withdrawal rules and have started reading more. I know contributions come first, conversions come second, and as long as the conversions have 'aged' for 5 years (for each contribution) then there is no penalty here either.
For each Roth conversion or rollover that contained pre-tax money, the earnings or money that was untaxed at the time of the rollover sits on top of the part of the conversion/rollover that was not taxed. Did that make sense?Rolling over the earnings from the after tax 401k subaccount is where things seem to become more involved. I *think* that these earnings are withdrawn before the rollover conversion, so will be subject to a 10% penalty, and that these earings sit in the withdrawal stack next to each of their corresponding conversions (a graphic would probably help here lol).
This is how I envision your "stack":
- all the direct contributions from whatever years (but not the earnings)
First (oldest) back door - taxable part (if any) <--10% penalty if withdrawn before the 5 year clock expires
First back door - the part that was not taxed
Next oldest back door - taxable part (if any) <--10% penalty if withdrawn before the 5 year clock expires
Next oldest back door - the part that was not taxed
Next oldest - I'll assume this is a rollover from your 401k - taxable part (if any) <--10% penalty if withdrawn before the 5 year clock expires
Next oldest - I'll assume this is the rollover from your 401k - the after-tax part
Next oldest - whether it is a back door or a rollover - same as above
And the same on down to....
Earnings <--10% penalty and maybe taxed (?? I'm always confused about this part and don't want to look it up right now) if withdrawn before Roth is 5 years old and you are age 59.5
The only reason you have to track the 5 years is the earnings. If you send the earnings to tIRA instead, you don't have to track the 5 years at all (although it would be good to write down or document that there were no earnings). At least that is my understanding.My thinking was that if I just roll the contributions from the 401k into the ROTH, and keep the earnings out of it, my only concern will be the 5 year 'aging' of the conversion, i won't have to track the earnings.
I don't think this is a hijack - its a discussion of how to implement the subject of the original post.Hope I'm not hijacking the thread, maybe I should have started one concerning strategies for using the mega back door. But anyhow, that's why I was thinking what I was thinking.
This time next year could be fine. If you wait till December and need to clear out any money in your tIRA (for your back door) December would be a poor choice since not getting the tIRA empty by 12/31 would have consequences if you do a back door that year.The every other year idea could be a workable strategy, love the way you guys come up with this stuff! I don't plan on doing my conversion till about this time next year,so I've got plenty of time to think about it, but I want to have a plan in place by then so I can execute quickly and understand what I am doing and why.,
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Re: IRS Relents! Notice 2014-54 permits Basis Isolation
Thanks for writing up the stack, that is helpful and what I'm trying to understand. I believe (still looking into it) that when doing a backdoor roth, the converted amount (assume no earnings) has to age for 5 years before you can avoid the 10% penalty, and each time you do a backdoor conversion, each one has it's own 5 year clock. With the conversion from the after tax money from the 401k subaccount, I think the contributions can be withdrawn immediately. The earnings are where I get stuck. They can either be withdraw after 5 years to avoid the 10% penalty, or, and the one I think is the case, the penalty cannot be avoided unless they have aged 5 years *and* you are 59.5 (other exceptions apply but irrelevant for this discussion). I need to read more on this, it's just not clear to me yet, and this is why I was trying to keep the earnings out of it.This is how I envision your "stack":
- all the direct contributions from whatever years (but not the earnings)
First (oldest) back door - taxable part (if any) <--10% penalty if withdrawn before the 5 year clock expires
First back door - the part that was not taxed
Next oldest back door - taxable part (if any) <--10% penalty if withdrawn before the 5 year clock expires
Next oldest back door - the part that was not taxed
Next oldest - I'll assume this is a rollover from your 401k - taxable part (if any) <--10% penalty if withdrawn before the 5 year clock expires
Next oldest - I'll assume this is the rollover from your 401k - the after-tax part
Next oldest - whether it is a back door or a rollover - same as above
And the same on down to....
Earnings <--10% penalty and maybe taxed (?? I'm always confused about this part and don't want to look it up right now) if withdrawn before Roth is 5 years old and you are age 59.5
<GRIN!> Awesome! No worries, I'm doing my own research, using you guys as a sounding board to find out how much I still dont' understand! Thanks for responding to my mental dump!I hope I've got this right - due your own research rather than depend on some idiot on the internet.
Re: IRS Relents! Notice 2014-54 permits Basis Isolation
This is what I used to believe as well. However, interplanetjanet and Alan S got us straight on that several years back. Perhaps you could contact one of them for clarification. I don't recall seeing interplanetjanet lately but Alan S is definitely around pretty often.panhead wrote:I believe (still looking into it) that when doing a backdoor roth, the converted amount (assume no earnings) has to age for 5 years before you can avoid the 10% penalty, and each time you do a backdoor conversion, each one has it's own 5 year clock.
I understood from Alan S that these rollovers just fall into chronological order with your other conversions. I believe this was in the big mega back door thread. If that is correct, that money would not be as high on the stack as you are thinking.With the conversion from the after tax money from the 401k subaccount, I think the contributions can be withdrawn immediately.
Try the big Mega Back Door thread.The earnings are where I get stuck. They can either be withdraw after 5 years to avoid the 10% penalty, or, and the one I think is the case, the penalty cannot be avoided unless they have aged 5 years *and* you are 59.5 (other exceptions apply but irrelevant for this discussion). I need to read more on this, it's just not clear to me yet, and this is why I was trying to keep the earnings out of it.
For the earnings that occur once the money is in the Roth IRA, I think your 5 years and 59.5 are correct.
Did you see this one? http://www.investopedia.com/articles/re ... 030403.asp
Also, the Fairmark site has good informationl
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