Tax implications for moving IRA money with pre-tax and post-tax contribution

[NJ_Devils]

I have an IRA account that has pre-tax as well as post-tax contributions. I was thinking of consolidating and rolling my pre-tax IRA amount into my current 401k and the post-tax into the Roth IRA. Does the IRS allow such a thing?

P.S. Turbotax generated a Form 8606 for me last year, which doesn't look at each transaction but just net annual movements.

[macuser_22]

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@NJ_Devils wrote:

I have an IRA account that has pre-tax as well as post-tax contributions. I was thinking of consolidating and rolling my pre-tax IRA amount into my current 401k and the post-tax into the Roth IRA. Does the IRS allow such a thing?

P.S. Turbotax generated a Form 8606 for me last year, which doesn't look at each transaction but just net annual movements.

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If it is an IRA then no.

You can NEVER withdraw ONLY the nondeductible part - it must be prorated over the entire value of ALL Traditional IRA accounts which include SEP and SIMPLE IRA's. (For tax purposes you only have ONE Traditional IRA which can be split between as many different accounts as you want, but for tax purposes they are all added together).

For example using rough figures: if you had $60K of nondeductible contributions in an IRA with a total value of $600K (10:1 ratio), then when you take a $60K distribution from any IRA account $6,000 would be nontaxable and $54,000 would be taxable (same 10:1 ratio) , with the remaining $54K of basis staying in the IRA for future distributions. As long as there is any money in the IRA, there will be some basis.

TurboTax will ask for your non-deductible "basis" and then the *Total Value* of *all* Traditional IRA, SEP and SIMPLE accounts as of Dec 31, of the tax year. That is so the prorating of the basis can be properly proportioned between the current years distribution and the remaining IRA value. That is done on the 8606 form.

[NJ_Devils]

So, I was referring to the IRS instructions for "Rollovers to multiple destinations". See below. Basically, I don't want to keep the IRA. Just take all money out into the 401k and Roth IRA and be done with it.

From https://www.irs.gov/retirement-plans/rollovers-of-after-tax-contributions-in-retirement-plans

Rollovers to multiple destinations

Distributions sent to multiple destinations at the same time are treated as a single distribution for allocating pretax and after-tax amounts (Notice 2014-54 PDF). This means you can roll over all your pretax amounts to a traditional IRA or retirement plan and all your after-tax amounts to a different destination, such as a Roth IRA.

Example: You withdraw $100,000 from your plan, $80,000 in pretax amounts and $20,000 in after-tax amounts. You may request:

• A direct rollover of $80,000 in pretax amounts to a traditional (non-Roth) IRA or a pretax account in another plan,
• A direct rollover of $10,000 in after-tax amounts to a Roth IRA, and
• A distribution of $10,000 in after-tax amounts to yourself.

[macuser_22]

That is talking about rollover a 401(k) to IRA's.    You asked about rolling over an IRA.  I don't believe that pplies to IRA's. 

(User @dmertz what do you think?)

The first sentence says: Many savers have made after-tax contributions to a 401(k) or other defined contribution retirement plan. If your account balance contains both pretax and after-tax amounts, any distribution will generally include a pro rata share of both.

[NJ_Devils]

You are correct, I missed that distinction. Is there any way then where I can convert this IRA and just be done with it?

Since the Form 8606 produced by Turbo tax is a year-end form, I believe it's only going to look at my balances at the end of the year. Can't I put my pre-tax contribution into 401k and do the after-tax (non-deductible) portion into my Roth IRA? Year-end balance would be 0 for my IRA account.

[macuser_22]

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@NJ_Devils wrote:

You are correct, I missed that distinction. Is there any way then where I can convert this IRA and just be done with it?

Since the Form 8606 produced by Turbo tax is a year-end form, I believe it's only going to look at my balances at the end of the year. Can't I put my pre-tax contribution into 401k and do the after-tax (non-deductible) portion into my Roth IRA? Year-end balance would be 0 for my IRA account.

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Now that I think about it I am not sure which is why I asked our expert @dmertz for advice.

[Mike9241 · Accepted solution]

yes you can see table 1-4 page 22 in IRS pub 590-A for allowed rollovers 

https://www.irs.gov/pub/irs-pdf/p590a.pdf 

note that a portion of the rollover to the Roth may be taxable

the rule is that the amount of the distribution that would have been included in income if it were not converted to a Roth IRA is included in income in the year of the conversion. thus any part of the conversion that is attributable to basis is not included in income. 

[dmertz · Accepted solution]

Yes, you can roll the pre-tax portion, and only the pre-tax portion, over from your IRAs to a 401(k) because only pre-tax money is permitted to be rolled over to a 401(k), removing that portion from any involvement with Form 8606.  The remainder, the basis in nondeductible traditional IRA contributions, can then be converted to a Roth IRA.

[Critter-3]

I agree ... if you completely close the IRA then this will not be an issue.

[NJ_Devils]

I have been doing some digging here and think this makes sense.

One question though - If I transfer pre-tax money to 401k, then how will Turbotax represent that in any of the tax filings (Form 8606 or 1040 etc). Is there a way I can double check that I am doing this right?

[macuser_22]

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@NJ_Devils wrote:

I have been doing some digging here and think this makes sense.

One question though - If I transfer pre-tax money to 401k, then how will Turbotax represent that in any of the tax filings (Form 8606 or 1040 etc). Is there a way I can double check that I am doing this right?

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You will receive  1099-R and you just say that it was a rollover. 

[NJ_Devils]

@Mike9241 Very good point about some portion of the conversion to ROTH may be taxable. To your point, let's suppose there is a small amount of earnings (less than 2% over the total basis), how would you figure out how much of the earnings is attributable to the tax-deductible portion? and how do we do the tax treatment for that?

[NJ_Devils]

@dmertz Would appreciate your insight about the treatment for the small amount of earnings on the funds (tax deductible as well as non-tax deductible)? I would ideally want to just rollover all the earnings to the Roth IRA so I can finally have complete separation between the pre-tax and post-tax accounts but not sure what is the best way to go about this

[Mike9241]

follow form 8606 to determine the taxable portion.

Taxable Income On A Complete Roth Conversion
You need to figure the taxable income that you create when you convert your traditional IRA to a Roth IRA. This task is simple if you convert the entire traditional IRA -- the taxable income is equal to the total conversion amount minus the basis. For example, if your traditional IRA balance is $100,000 of which $13,000 represents non-deductible contributions, you create $87,000 in ordinary taxable income through the Roth IRA conversion. Of course, your actual tax bill for the year depends on your total income, deductions and credits. Traditional IRAs require minimum distributions once you attain age 70½. You cannot convert any required minimum distributions for the tax year.

Taxable Income On A Partial Roth Conversion
Although you can convert only part of your traditional IRA to a Roth IRA, you cannot specify a partial rollover of only your non-deductible contributions. Rather, the IRS requires you to prorate your non-deductible contributions as a percentage of your total traditional IRA money on Form 8606.

[dmertz]

I don't understand the question.  With regard to distributions, conversions and taxation, all of your traditional IRAs are treated as a single IRA.  There are no separate pre-tax IRA and post-tax IRA accounts.