Rollover after-tax funds in an IRA to a Roth IRA?

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
Maddox
Posts: 5
Joined: Wed Jul 12, 2017 5:26 pm

Rollover after-tax funds in an IRA to a Roth IRA?

Post by Maddox » Wed Jul 12, 2017 5:39 pm

I have an IRA that I started with after-tax dollars and continued contributing after-tax funds for a number of years. As I approach retirement, I've learned that commingled after-tax and pre-tax funds complicates distribution for the universe of IRAs that I have.

So it would seem the simple solution might be to extract the after-tax funds from the traditional IRA and roll the into a Roth. Is this as simple as:

I have, for example, an IRA with $30,000 total of which $6,000 was after-tax contributions. Can I simply extract that $6,000 of after-tax money from that IRA and roll it into a new Roth IRA account - and yes I have IRS 8606 records on the after-tax contributions. In this case, I will end up with:

$24,000 in the original IRA - now all pre-tax dollars
$6,000 in new Roth IRA

or do I have to open two new IRAs, one Roth and one traditional, and roll $6,000 into the Roth and $24,000 into the new traditional IRA, and then close the old account? Or even more complex, do I have to do some kind of pro-rata distribution?

Thanks for the advice - I couldn't get a straight "google" answer.

jebmke
Posts: 6659
Joined: Thu Apr 05, 2007 2:44 pm

Re: Rollover after-tax funds in an IRA to a Roth IRA?

Post by jebmke » Wed Jul 12, 2017 5:51 pm

Maddox wrote:I have, for example, an IRA with $30,000 total of which $6,000 was after-tax contributions. Can I simply extract that $6,000 of after-tax money from that IRA and roll it into a new Roth IRA account - and yes I have IRS 8606 records on the after-tax contributions.
You cannot do this. The IRS considers all traditional IRA accounts as one pool. If you convert some or all of the co-mingled funds, the pre-tax and after-tax funds are prorated. The pre-tax would be reportable as ordinary income. Whether it is taxed depends on the total of your tax situation.
When you discover that you are riding a dead horse, the best strategy is to dismount.

kaneohe
Posts: 4357
Joined: Mon Sep 22, 2008 12:38 pm

Re: Rollover after-tax funds in an IRA to a Roth IRA?

Post by kaneohe » Wed Jul 12, 2017 5:55 pm

Maddox wrote:I............................. Or even more complex, do I have to do some kind of pro-rata distribution?

..............................................
Yes..........and if you have any other TIRAs, you have to take them into account also. IRS considers them just one big TIRA.
You can think of it as a mixture of water (deductible contributions/earnings) and antifreeze (non-deductible contributions).
In the one big TIRA they are all mixed together. You know the composition from the 8606 and the total account value but it is
one homogeneous mixture so cannot separate the 2 components for this purpose (although there is one case where you can
perform this separation magic (does not apply here). edit to add: this reply was written "narrowly" to answer OP questions.
The separation magic can be performed to separate deductible/nondeductible components by rolling deductible part into 401K
as suggested by BL in post below.

You should use F8606 and make a simulated withdrawal to see how the calculation works.
Last edited by kaneohe on Wed Jul 12, 2017 7:46 pm, edited 1 time in total.

User avatar
BL
Posts: 7245
Joined: Sun Mar 01, 2009 2:28 pm

Re: Rollover after-tax funds in an IRA to a Roth IRA?

Post by BL » Wed Jul 12, 2017 6:12 pm

Some are able to roll pre-tax into work 401k and then convert the rest.

Maddox
Posts: 5
Joined: Wed Jul 12, 2017 5:26 pm

Re: Rollover after-tax funds in an IRA to a Roth IRA?

Post by Maddox » Thu Jul 13, 2017 11:15 am

Thanks for the responses.

So to verify, I still have a work 401k I can use to roll the pre-tax portion to. And then I can convert the after-tax component of the IRA to a Roth and avoid the mixed IRA challenge?

CppCoder
Posts: 516
Joined: Sat Jan 23, 2016 9:16 pm

Re: Rollover after-tax funds in an IRA to a Roth IRA?

Post by CppCoder » Thu Jul 13, 2017 11:49 am

Maddox wrote:Thanks for the responses.

So to verify, I still have a work 401k I can use to roll the pre-tax portion to. And then I can convert the after-tax component of the IRA to a Roth and avoid the mixed IRA challenge?
Depends on what your work plan allows. Check with your plan administrator first.

Alan S.
Posts: 6852
Joined: Mon May 16, 2011 6:07 pm
Location: Prescott, AZ

Re: Rollover after-tax funds in an IRA to a Roth IRA?

Post by Alan S. » Thu Jul 13, 2017 12:02 pm

Maddox wrote:Thanks for the responses.

So to verify, I still have a work 401k I can use to roll the pre-tax portion to. And then I can convert the after-tax component of the IRA to a Roth and avoid the mixed IRA challenge?
Yes. You can even convert the basis first if you are sure that the plan will accept the remainder of your IRA balance. You could convert now, and the rollover to the 401k must be done before year end.

Maddox
Posts: 5
Joined: Wed Jul 12, 2017 5:26 pm

Re: Rollover after-tax funds in an IRA to a Roth IRA?

Post by Maddox » Thu Jul 13, 2017 4:25 pm

Many thanks!!!!

User avatar
celia
Posts: 6914
Joined: Sun Mar 09, 2008 6:32 am
Location: SoCal

Re: Rollover after-tax funds in an IRA to a Roth IRA?

Post by celia » Thu Jul 13, 2017 5:34 pm

Maddox wrote:I have, for example, an IRA with $30,000 total of which $6,000 was after-tax contributions. Can I simply extract that $6,000 of after-tax money from that IRA and roll it into a new Roth IRA account - and yes I have IRS 8606 records on the after-tax contributions. In this case, I will end up with:

$24,000 in the original IRA - now all pre-tax dollars
$6,000 in new Roth IRA
So far, the answers before this have been generic answers pertaining to the case where you have rolled over 401K (or other employer retirement account) funds to a Traditional IRA plus added non-deductible contributions to the same account. In that case, your Traditional IRA would now contain:
401K rollover from a previous employer
gains from the 401K rollover since it went into the tIRA
non-deductible IRA contributions
gains from the non-deductible IRA contributions


Current 401Ks do not have to accept previous 401K rollovers and the gains made since they were put in the TIRA. They are permitted (but not required) to accept deductible IRA contributions and their gains. But they are NOT allowed to accept non-deductible contributions and their gains.

If the only money that went into the account was non-deductible IRA contributions and it has since grown to today's account value, you will be unable to move anything to a 401K. Check with your 401K plan to verify this. Ask them which of these things in your Traditional IRA can be rolled into the 401K:
401K rollover from a previous employer
gains from the 401K rollover since it went into the tIRA
deductible IRA contributions
gains from the deductible IRA contributions
non-deductible IRA contributions
gains from the non-deductible IRA contributions


If this is the case, in order to convert to a Roth, you will have to pay taxes on the gains. (You should have converted to a Roth right after the contributions were made each year, then the gains would have grown tax-free within the Roth.) Now you have the case where 1/5 of every withdrawal or Roth conversion is tax-free and 4/5 of it will be taxed (since 6,000 is 1/5 of 30,000). And if there is a partial conversion, the money that stays in the tIRA will remain partly tax-free. This is because all the dollars are considered co-mingled. And if you own any other non-Roth IRAs, they will also be taken into account for the tax calculation.

In other words, the pro rata rule WILL apply in this case.

Please advise us as to all the money that was contributed to the tIRA and what other non-Roth IRAs you have.

Alan S.
Posts: 6852
Joined: Mon May 16, 2011 6:07 pm
Location: Prescott, AZ

Re: Rollover after-tax funds in an IRA to a Roth IRA?

Post by Alan S. » Thu Jul 13, 2017 6:29 pm

celia wrote:
Maddox wrote:I have, for example, an IRA with $30,000 total of which $6,000 was after-tax contributions. Can I simply extract that $6,000 of after-tax money from that IRA and roll it into a new Roth IRA account - and yes I have IRS 8606 records on the after-tax contributions. In this case, I will end up with:

$24,000 in the original IRA - now all pre-tax dollars
$6,000 in new Roth IRA
So far, the answers before this have been generic answers pertaining to the case where you have rolled over 401K (or other employer retirement account) funds to a Traditional IRA plus added non-deductible contributions to the same account. In that case, your Traditional IRA would now contain:
401K rollover from a previous employer
gains from the 401K rollover since it went into the tIRA
non-deductible IRA contributions
gains from the non-deductible IRA contributions


I believe all 401Ks have to accept the previous rollover and its gains made since it was put in the tIRA and they are permitted (but not required) to accept deductible IRA contributions and their gains, but are NOT allowed to accept non-deductible contributions and their gains.

QRPs do not have to accept ANY IRA rollovers including rollover (formerly conduit) IRAs. But plans are allowed to accept all IRA money other than basis. So other than disallowed basis amounts, the plan is allowed considerable flexibility.

If the only money that went into the account was non-deductible IRA contributions and it has since grown to today's account value, you will be unable to move anything to a 401K. Check with your 401K plan to verify this.

No, the QRP can accept the earnings if the plan accepts rollovers from non rollover IRA accounts. In other words, QRPs will almost always follow one of these rollover policies:
1) Accept no IRA rollovers whatsoever
2) Accept rollover IRA accounts only except for after tax rollover money (post 2002 after tax QRP contributions)
3) Accept ALL pre tax IRA money

Ask them which of these things in your Traditional IRA can be rolled into the 401K:
401K rollover from a previous employer
gains from the 401K rollover since it went into the tIRA
deductible IRA contributions
gains from the deductible IRA contributions
non-deductible IRA contributions
gains from the non-deductible IRA contributions

Best to keep the questions simple. For example, "does the plan accept rollovers from my IRA? - If so, are there any restrictions in addition to IRA basis?"
If the plan only accepts rollover IRA money, then ask "Will you accept the non rollover IRA money if I certify that there is NO IRA basis included?
(The following IRS guidance was issued to make it easier for QRPs to accept IRA rollovers: https://www.irs.gov/irb/2014-17_IRB/ar05.html)

If this is the case, in order to convert to a Roth, you will have to pay taxes on the gains. (You should have converted to a Roth right after the contributions were made each year, then the gains would have grown tax-free within the Roth.) Now you have the case where 1/5 of every withdrawal or Roth conversion is tax-free and 4/5 of it will be taxed (since 6,000 is 1/5 of 30,000). And if there is a partial conversion, the money that stays in the tIRA will remain partly tax-free. This is because all the dollars are considered co-mingled. And if you own any other non-Roth IRAs, they will also be taken into account for the tax calculation.

In other words, the pro rata rule WILL apply in this case.

Please advise us as to all the money that was contributed to the tIRA and what other non-Roth IRAs you have.

Maddox
Posts: 5
Joined: Wed Jul 12, 2017 5:26 pm

Re: Rollover after-tax funds in an IRA to a Roth IRA?

Post by Maddox » Tue Oct 10, 2017 5:16 pm

It has been a few months and here is where I am headed. My current employer's 401K does not allow the rollover of pre-tax money from no-conduit IRA accounts. So I changed course to establish a solo 401K account from etrade that allows such transfers.

The etrade solo 401K supports both traditional and Roth accounts under the solo 401K umbrella. But I don't think I need the Roth account under this umbrella for what I want to do, which is:

Roll the pre-tax portion of the traditional (non-conduit) IRA that has both pre-tax and after-tax dollars, into the Solo 401K traditional account. Now my traditional IRA only has after-tax dollars in it. So I roll the after-tax dollars into a Roth account (not a Roth account under the Solo 401K umbrella).

If this satisfies IRS rules, I'm happy....what do you think?

Alan S.
Posts: 6852
Joined: Mon May 16, 2011 6:07 pm
Location: Prescott, AZ

Re: Rollover after-tax funds in an IRA to a Roth IRA?

Post by Alan S. » Tue Oct 10, 2017 8:03 pm

That will work. Whether you add a Roth option to the solo K or not does not matter because you cannot roll after tax IRA money into a designated Roth account (Roth 401k) or into the pre tax 401k account.

You can convert your after tax IRA basis per Form 8606 to your Roth IRA either before or after you roll the pre tax balance to the solo K. I assume that you have a going side business from which you can also make elective deferrals to your solo K.

Maddox
Posts: 5
Joined: Wed Jul 12, 2017 5:26 pm

Re: Rollover after-tax funds in an IRA to a Roth IRA?

Post by Maddox » Thu Oct 12, 2017 10:37 am

Thanks, Alan.

Do I have to have any side business contributions to the solo 401K to satisfy IRS, or can I just use it to roll the pre-tax from my IRA (and keep that in the solo 401K)?

Post Reply