Retirement tax questions


@dmertz wrote:

 

The 2007 Treasury Decision that you referenced predates the permissibility of IRRs.  Prior to September 28, 2010, rollovers from a designated Roth account could consist only of regular contribution basis and earnings (because prior to that date there could be no basis in IRRs).  IRRs became available for only those distribution made after September 27, 2010.  See IRS Notice 2010-84 issued after the passing of the law that added IRRs to the tax code.

As I said in my previous reply, basis in IRRs becomes Roth conversion basis in the Roth IRA.


Thank you for pointing this out. I read both https://www.irs.gov/irb/2010-51_IRB#NOT-2010-84 and https://www.irs.gov/irb/2013-52_IRB#NOT-2013-74, but I couldn't find where they mentioned that basis in IRRs on the Roth 401K are considered to be rollovers/conversion basis (bucket 2) in the Roth IRA. Please point me to the paragraph that mentions that or that one could make such an interpretation.

 

Note, however, that your IRR was, absent any investment gains, a nontaxable IRR so that when rolled over to the traditional IRA it becomes basis in nontaxable Roth conversions, nearly equivalent to Roth IRA contribution basis because a distribution of basis in nontaxable Roth conversions is not subject to any early-distribution penalty; only taxable distributions are potentially subject to an early-distribution penalty.


Yes, I agree with you on this. My IRRs come from after-tax money, which I rolled over immediately to the Roth 401K. So when the Roth 401K --> Roth IRA rollover is executed, they become part of the nontaxable contribution/rollover (bucket 2) --Here, I am going with your interpretation of IRRs being considered Roth conversions.

 


Under the ordering rules, though, basis in nontaxable Roth conversions is distributed after basis in taxable Roth conversions from the same taxable year, so if there is any basis in taxable Roth conversions from the same year, perhaps because there was an investment gain prior to the IRR that made some portion of the IRR taxable, the basis in taxable Roth conversions would come out first, potentially subject to an early distribution penalty.  After the 5-year clock for the particular Roth conversion basis has run out the penalty on the distribution of that basis in taxable Roth conversions is no longer subject to any early-distribution penalty.


Right. First come taxable conversions/rollovers, and then non-taxable conversions/rollovers. The 5-year clock applies because the IRR is considered to be a conversion/rollover, but it only applies to the taxable part of it. I checked my 1099-R forms and see that every year, I have about 2 or 4 dollars reported in box 2.a (taxable amount).

 

To summarize, I am not 100% sure that IRRs belong to bucket 2, and it would be great if you could point me to where this is defined or interpreted.

 

In my case, the difference doesn't matter much because my Roth IRA only has money from a) after-tax contributions to a Traditional IRA that was then converted to a Roth IRA (backdoor Roth) and b) IRRs that I would start rolling over once I am not longer employed (assuming < 59 1/2).