I want to roll my after tax IRA contribution to a roth IRA and the earnings into a traditional IRA. How do I do that?

[topmiller]

Link to IRS page indicating I can.  https://www.irs.gov/retirement-plans/rollovers-of-after-tax-contributions-in-retirement-plans#:~:tex....

Can I roll over my after-tax contributions to a Roth IRA and the earnings on my after-tax contributions to a traditional IRA?
Yes.  Earnings associated with after-tax contributions are pretax amounts in your account.  Thus, after-tax contributions can be rolled over to a Roth IRA without also including earnings.  Under Notice 2014-54, you may roll over pretax amounts in a distribution to a traditional IRA and, in that case, the amounts will not be included in income until distributed from the IRA.

[dmertz]

"I want to roll my after tax IRA contribution to a Roth IRA and the earnings into a traditional IRA. How do I do that?"

You can't do that.  The reference that you provided addresses a rollover from the traditional account in an employer's qualified retirement plan like a 401(k) and is not permitted to be applied to a Roth conversion from a traditional IRA.

To accomplish what you want, you would have to roll all of the pre-tax funds to a traditional account an employer's qualified retirement plan, not to a traditional IRA.  (This is different than what is described in IRS Notice 2014-54.)  Because only pre-tax funds are permitted to be rolled over to the qualified retirement plan, rolling over all of the pre-tax funds from your traditional IRAs to a qualified retirement plan would leave just the after-tax funds in the traditional IRAs that could be converted to a Roth IRA tax-free.

Still, if the earnings in the traditional IRAs are relatively small, it would generally make more sense just to convert the all of the funds from the traditional IRAs to a Roth IRA and pay the taxes on the pre-tax portion of the conversion.

[topmiller]

Thank you for your response.  Can you give me a link or reference to an IRS website that describes the roll over to a qualified employer plan that you mentioned?  I have an employer 401k plan but not sure if it allows roll overs from an IRA into it.

[dmertz]

Section 408(d)(3)(A)(ii) of the tax code regarding rollovers to an eligible retirement plan states:

(ii)the entire amount received (including money and any other property) is paid into an eligible retirement plan for the benefit of such individual not later than the 60th day after the date on which the payment or distribution is received, except that the maximum amount which may be paid into such plan may not exceed the portion of the amount received which is includible in gross income (determined without regard to this paragraph).

It's this statutory limitation on rolling over to the eligible retirement plan only the pre-tax portion of the distribution that creates the opportunity to separate the pre-tax portion of your traditional IRAs from the after-tax portion of your traditional IRAs.  Note that if you have more than one traditional IRA, all of your traditional IRAs must be treated in aggregate for this purpose.

IRS Pub 590-A refers to this section of the tax code as follows:

Tax treatment of a rollover from a traditional IRA to an eligible retirement plan other than an IRA. Ordinarily, when you have basis in your IRAs, any distribution is considered to include both nontaxable and taxable amounts. Without a special rule, the nontaxable portion of such a distribution couldn’t be rolled over. However, a special rule treats a distribution you roll over into an eligible retirement plan as including only otherwise taxable amounts if the amount you either leave in your IRAs or don’t roll over is at least equal to your basis. The effect of this special rule is to make the amount in your traditional IRAs that you can roll over to an eligible retirement plan as large as possible

Before attempting such a rollover you would want to confirm with your employer plan that they will accept the rollover.

[topmiller]

Thanks for the response.  I'm trying to understand "all of your traditional IRAs must be treated in aggregate for this purpose."  I don't see that specifically stated in IRS Pub 590-A.  Maybe, " However, a special rule treats a distribution you roll over into an eligible retirement plan as including only otherwise taxable amounts if the amount you either leave in your IRAs or don’t roll over is at least equal to your basis." ?

My situation: I currently have a 401k, and two IRAs.  Both IRAs were direct transfers from 401ks so started with pretax contributions.  One IRA I have not contributed to so should be 100% pretax and about half the size of the other IRA.  The other IRA I have done non-deductible contributions for about 25 years.  The earnings plus the starting pretax value from the 401k rollover are about 70% of the current value.  The IRS Pub 590-A statement above seems to indicate that I should not roll over the basis which is my non-deductible contributions and much less than what I would roll over.  I would like to only roll over the second IRA and that seems like it satisfies the IRS Pub 590-A statement.  Can you explain why I can't do that?

[topmiller]

I also found this n-14-54.pdf (irs.gov) which shows an example in section V of what I want to do.  It has the after-tax going to a Roth IRA and the pre-tax going to a traditional IRA.  But this may be different since the source is an IRA and not a qualified plan.

[dmertz · Accepted solution]

"I'm trying to understand 'all of your traditional IRAs must be treated in aggregate for this purpose.' "

This is the case for determining the tax treatment of any regular distribution from a traditional IRA.  Your basis in nondeductible traditional IRA contributions applies to your traditional IRAs in aggregate, not to any particular one of your traditional IRAs no matter which traditional IRA received the actual deposit of your nondeductible contribution.  Line 6 of Form 8606 is required to show the combined year-end balance of all of your traditional IRAs, so to be able to convert all of your basis you must have a $0 total balance in traditional IRAs at year-end so that line 6 of Form 8606 will be zero.

With regard to IRS Notice 2014-54, I'll repeat what I said earlier.  This notice does not apply to distributions from IRAs.  An IRA is not a "qualified retirement plan" as the term is used in the tax code and in this notice.

[topmiller]

Follow up.  My 401k does allow IRAs to be rolled in as long as they are labeled as Rollover IRAs which both of them are labeled as such because I rolled them out of 401k plans.  Thanks for the help!