IRA Basis and Pro-rata Rule for after-tax IRA contributions

[168kenn]

I made after-tax contributions to my company retirement plans. When I left them, I received a statement indicating the amount of my after-tax dollars. I rolled 100% of the investments into my IRA. I never received any other documents like an 8606. In 2019 I took my first RMD at the required amount. Later, I rolled money from the IRA into my Roth IRA. I'm having trouble using turbo tax to calculate the correct basis to apply the pro-rata rule. 

Using a made-up example:

Total of 12/31/18 IRAs -$100,000

Total after-tax contributions $20,000

% after-tax -20%

2019 IRA Distribution-$10,000

2019 IRA Rollover-$5,000

What is my IRA basis on 12/31/18? It's not the balance and appears not to be the balance less than the after-tax amount.

I can apply the pro-rata to the RMD but do I need to apply it to the Roth rollover? 

I can't figure out what numbers Turbo-Tax is requesting, I've tried various amounts but I know the result is wrong. 

When you respond, please include the math for my example with your explanation.

Thanks

[macuser_22]

The "math" requires knowing the *2019* total year end value of ALL Traditional, SEP and SIMPLE IRA accounts in order to prorate it. The 2018 value in immaterial.

If there is after-tax money in the IRA then ALL distributions (including Roth conversions) will include some after-tax money.   That calculation in done on lines 6-15 on a 8606 form.

Since you did not file a prior 8606 form the enter the known amount of after-tax when the interview asks for it.  If it asks for an explanation - just say it is after-tax money from a 401(K) rollover.

Enter a 1099-R here:

Federal Taxes,
Wages & Income
(I'll choose what I work on - if that screen comes up)
Retirement Plans & Social Security,
IRA, 401(k), Pension Plan Withdrawals (1099-R).

OR Use the "Tools" menu (if online version left side) and then "Search Topics" for "1099-R" which will take you to the same place.

Be sure to choose which spouse the 1099-R is for if this is a joint tax return.
Be sure to pick the correct 1099-R type: Standard 1099-R, CSA-1099-R, CSF-1099-R, RRB-1099-R.

[NOTE: When you get to the "Your 1099-R Entries" screen where you can add another 1099-R, use "continue" to keep going as there are additional interview questions after that screen in most cases. You can always return as shown above.]

You will be asked of you had and tracked non-deductible contributions - say yes. The enter the amount from the last filed 8606 form line 14 if it did not transfer. Then enter the total value of any Traditional, SEP and SIMPLE IRA accounts that existed on December 31, 2019.

That will produce a new 8606 form with the taxable amount calculated on lines 6-15 and the remaining carry-forward basis on line 14.

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.

[168kenn]

Thank you for your response, it's very comprehensive. There is one part I don't understand. The calculation of my 2019 RMD was based on my IRA balance at 12/31/18. I'm now preparing my 2019 taxed and have to pay tax on the RMD some of which is after-tax dollars. Why does the math require my 2019 ending balance? That impacts my 2020 RMD. 

My question is the same for the Roth rollover, I need to pay the 2019 tax on the rollover some of the amount includes after-tax dollars. Again, why does the math require my 2019 ending balance? I have to pay tax on the rollover amount in 2019?

Thank you

[macuser_22]

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@168kenn wrote:

Thank you for your response, it's very comprehensive. There is one part I don't understand. The calculation of my 2019 RMD was based on my IRA balance at 12/31/18. I'm now preparing my 2019 taxed and have to pay tax on the RMD some of which is after-tax dollars. Why does the math require my 2019 ending balance? That impacts my 2020 RMD. 

My question is the same for the Roth rollover, I need to pay the 2019 tax on the rollover some of the amount includes after-tax dollars. Again, why does the math require my 2019 ending balance? I have to pay tax on the rollover amount in 2019?

Thank you

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The 2019 RMD calculation has nothing to do with the taxable/non-taxable amount of the distribution that is based on the *2019* year end balance.  Your IRA account trustee (or you) calculate the RMD using the 2018 value. 

The year end value is require to calculate the non-deductible basis between the 2019 distribution and remaining IRA value to be applied to future distributions.

You can NEVER withdraw ONLY the nondeductible part - it must be prorated over the entire year end 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.

[macuser_22]

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@168kenn wrote:

 That impacts my 2020 RMD. 

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Yes it does.  A common error is not to enter the 2019 year end value which will improperly apply ALL of the non-deductible basis to the current distribution  rather just only a part of it.   That will leave no basis to apply to future years and will eventually lead to a IRS audit and a large tax bill.

[bp59272]

I have a similar concern. First, I forgot to move nondeductible (after tax) portion in my rollover IRA from 401K to Roth in 2017. Also TurboTax never asked me to file Form 8606 in 2017. Then in 2019, I took a withdrawal, hoping that it would be non-taxable. For 2019 tax filing, what should be my correct approach. I am not sure and aslo I don't understand what TurboTax is guiding me. 

[whbunn]

TT did not ask about my non-taxable amount of my distribution.  I can't find where to enter that information.  Therefore I paid taxes on the full amount.  I need to amend return to account for my after tax contributions.

My 1099R does not contain info for use, but I do know the amount of my after tax contributions.

[macuser_22]

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@whbunn wrote:

TT did not ask about my non-taxable amount of my distribution.  I can't find where to enter that information.  Therefore I paid taxes on the full amount.  I need to amend return to account for my after tax contributions.

My 1099R does not contain info for use, but I do know the amount of my after tax contributions.

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Is the IRA/SEP/SIMPLE box checked on you 1099-R?

How (and what year) did the after-tax basis get into the IRA?    Do you have a 8606 form for that tax year with the basis in box 14 as required (unless the contribution was a 2019 contribution) ?

[whbunn]

Yes, IRA box is checked.

I began withdrawals in tax year 2017 , RMD.  I failed to take into account my after tax contributions, so no 8606 generated.  My error.  After tax money put in over my working years 1975-2005.  Nor did I use 8606 for tax years 2018 and 2019.  I've made no contributions since I retired.

I did not fill out 8606 when I made first withdrawal tax year 2017 RMD.

While 1099R box seven is code 7 it is a 401k account.

I have tried using 8606 on duplicate file but I can't seem to get it to calculate pro-rated taxable amount.  When I switch forms the 8606 I filled in disappears.

What can I do?

[dmertz]

If the IRA/SEP/SIMPLE box is marked on the Form 1099-R provided by the payer, the payer is indicating that the distribution from from an IRA, not from a 401(k).  Perhaps you rolled a 401(k) into an IRA, in which case the money is now in an IRA, not in a 401(k), and is subject to IRA rules.

Nondeductible traditional IRA contributions were not permitted prior to 1987.  Any nondeductible contributions made directly to the IRA for 1987 or later were required to have been reported on Form 8606 for the year for which the contribution was made.  (Between 1987 and 2015, the maximum possible IRA contributions would have been $104,500, any portion of which could have been made as nondeductible contributions reported on Forms 8606).

Elective deferrals and employer contributions to your 401(k) were not after-tax contributions.  Did you make other, after-tax contributions to a 401(k) that were subsequently rolled over to the IRA and, if so, do you have documentation to support the amount of your after-tax 401(k) contributions?

[macuser_22]

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@whbunn wrote:

Yes, IRA box is checked.

I began withdrawals in tax year 2017 , RMD.  I failed to take into account my after tax contributions, so no 8606 generated.  My error.  After tax money put in over my working years 1975-2005.  Nor did I use 8606 for tax years 2018 and 2019.  I've made no contributions since I retired.

I did not fill out 8606 when I made first withdrawal tax year 2017 RMD.

While 1099R box seven is code 7 it is a 401k account.

I have tried using 8606 on duplicate file but I can't seem to get it to calculate pro-rated taxable amount.  When I switch forms the 8606 I filled in disappears.

What can I do?

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A 1099-R with the IRA box checked and a code 7 is a Traditional IRA distribution.

Did you actually contribute directly to a Traditional IRA or was this a 401(k) plan that you rolled over to a Traditional IRA?  

The first year that a non-deductible (after-tax) contribution to a Traditional IRA was allowed was 1987.   Any  non-deductible Traditional IRA contribution from 1987 to present MUST be reported on a 8606 form that that tax year in order to be used as basis now.   Any Traditional IRA distribution  must also be reported on a 8606 form for that year.    

If you made any Traditional, SEP or SIMPLE IRA contributions that were not deducted after 1986 then a 8606 for that year must be sent to the IRS or all basis will be disallowed.

If you had a Traditional IRA that had a after-tax basis and took distributions from a Traditional IRA in 2017  & 2018 then you need to amend those tax years to correctly calculate the taxable amount on a 8606 for those years.

NOTE that there is a $50 penalty for failing to file a 8606 for any tax year that was required.  (The IRS can waive the penalty if you provide a reasonable explanation).

You can download blank 8606 forms for 1987 to present here:

https://apps.irs.gov/app/picklist/list/priorFormPublication.html?indexOfFirstRow=50&sortColumn=sortO...