I have a traditional IRA with Vanguard that has both pre-and post-tax funds in it. The pre-tax funds are from an old 401(k) rollover+earnings, and the post-tax funds are from non-deductible traditional IRA contributions.
In preparation for a Roth conversion, I'm hoping to conduct a reverse rollover of all pre-tax contributions+ earnings so that I am just left with my basis/post-tax money in the account.
I spoke with Vanguard today and they told me that I cannot do a reverse rollover because it is not possible to "separate the coffee from the cream." They told me that if I want to convert to a Roth, I would have to convert both the pre- and post-tax funds, and therefore be subject to the pro-rata rule.
However, I don't think the advice I got from Vanguard is correct... I believe that in IRS Pub 590 A, they call out a special rule which enables pre- and post-tax funds to be separated when doing a reverse rollover.
Specifically, it says:
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.
Am I right, or is Vanguard right?