after tax funds in SEPP IRA

L1: after tax funds in SEPP IRAFouryears ago, my husband rolled his $870,000 401k into an IRA which has grown to 1.4 million.Heis planning to start SEPP payments in November 2007 afterestablishing$500,000 in a separate IRA for the SEPP by 10/31/2007. We are meeting with our planner to do this within the week. However, in preparing for this meeting, I now realize that his IRA contains “after tax” contributions from reinvested company stock dividends on which we paid taxes. Unfortunately, we did not take out these “after tax” contributions before the roll-over. We also did nottake advantage of the “net unrealized appreciation” as wereceived poor advice.
We do not want to make any further mistakes. So, wewant to know: how should we handle the SEPP payments with regard to the “after tax contributions” portion? My husband is 52 and I am 49. He is not in the best of health. But, does not qualify for disability.2007-10-18 09:02, By: dillonfan, IP: [69.61.178.185]

L2: after tax funds in SEPP IRAWhat”s done is done. You cannot undo things and start over. You now have a two very nice IRA”s and the IRA rules apply.However, all is not a total disaster.
Since you have after-tax contributions comingled with pre-tax contributions, you will use IRS Form 8606 to figure the distribution ratio of taxable and non-taxable distributions. PLEASE don”t try to do this yourself. Get help from a qualified tax professional … CPA or EA. You will have to take into account the total amount of all of your husband”s IRA”s for Form 8606 purposes but the SEPP IRA will stand alone for 72(t) purposes.
Good luck.
Jim
2007-10-18 09:20, By: Jim, IP: [24.252.195.14]

L2: after tax funds in SEPP IRAThe first responder is absolutely correct. He”s the first practitioner, besides myself, to understand this other use for the IRS form 8606. But let me clarify so you will understand the essence of what this does.
Usually form 8606 is used to report “NON-DEDUCTIBLE ANNUAL IRA CONTRIBUTIONS TO TRADITIONAL IRAs”. Then, when you start to take distributions you havce to make a calculation EACH YEAR of the taxable and non-taxable portion of each year”s distribution. (Actually form 8606 does the calculation.) For example,assume thatyou had made $ 10,000 of NON-DEDUCTIBLE CONTRIBUTIONS during your lifetime, and you made $ 65,000 in deductible contributions over the years. At the end of last year (2006) it was worth $ 100,000. If you took any distribution in 2007, or a REQUIRED MINIMUM DISTRIBUTION (about 4%), of $ 4,000 then $ 400 ( $10,000/$100,000=1/10) would be non-taxable. If at the end of 2007 it was worth $120,000, and the next year (2008) you took $ 6,000 (which is more than the RMD of4%), then $ 500 ( $ 10,000/$120,000=1/12) would be non-taxable.
In your case, the entire after-tax amount that you transferred to your IRA becomes the “NON-DEDUCTIBLE” amount in the calculation, which you will recover tax-free over many future years, but in total will be received entirely tax free ultimately. It is important to file this 8606 form every year hereafter, and to advise your spouse and future bebeficiaries as well. Otherwise they will pay taxes on the remaining amount because they will not know about the “non-deductible” nuance.2007-10-18 14:29, By: dlzallestaxes, IP: [141.151.95.239]

L2: after tax funds in SEPP IRAI agree with both the prior posts.
However, you should be sure your 8606 forms have been filed properly in the past so that you can benefit from the albeit small portion of the 72t distribution that will be tax free. The 8606 cumulatively documents the basis that applies to the individual taxpayer, adding basis for non deductible IRA contributions and after tax employer plan rollovers and applying a pro rated portion of the basis in each IRA distribution or Roth conversion. The latest 8606 will show the cumulative balance of which the calculation is made and how much is left to carry into the following year. The after tax rollover 4 years ago should have been added on line 2 of the 8606 for that year. Ifthe 8606 is not correct, the taxation of your 72t or any other distribution will also be incorrect. If you need to rehab your 8606 forms, start with the oldest year and move forward through each year and send stand alone corrected 8606 form to the IRS. They have been accepting these late filed forms without penalty, but that may not last forever.
Bottom line, this has nothing to do with the validity of your 72t, since that is based on gross distributions for a correct calculation. However, it does affect the amount of the 72t distribution that is taxable and appears on line 15b of Form 1040. 2007-10-18 15:48, By: Alan S., IP: [24.116.165.60]

L2: after tax funds in SEPP IRACLARIFICATION — The 8606 is one of the few, if only, tax forms that can be filed separate from the 1040 tax return for a given year. It is also one of the few tax forms, other than the tax return itself, that requires a signature if not filed with the tax return.
I agree with Alan to file the 8606 for the appropriate tax year 4 years ago, even though it is technically beyond the statute of limitations for amending that year. I would also file it for 2004, 2005, and 2006 at this time just to get a complete documentation on file with IRS. None of these 8606 forms will show any distributions, and only the first one will show the initial NON-DEDUCTIBLE CONTRIBUTION (i.e. the after tax dollars rolled over). The years since then will show that same figure as the IRA BASIS. (You don”t think the IRS would use simple, understandavble terminology, do you ???)2007-10-18 16:33, By: dlzallestaxes, IP: [141.151.95.239]