After Tax Dollars
L1: After Tax DollarsI just turned 59 1/2 and my modification date is 2/15/11. When I began my 72t in 2/15/06 I had after tax dollars in my IRA. I have filed a IRS form 8606 each year. I will still have after tax dollars in my IRA at the end of my SEPP. ?My I take the total basis at once or do I have to continue filing a 8606 until my cost basis is depleted? Finally, thanks to everyone on this website for your help over the last 5 years.2010-11-22 14:41, By: hsfmini, IP: [184.108.40.206]
L2: After Tax DollarsIf there are after-tax dollars in your IRA, then a part of every withdrawal from any of your IRA accounts is part after-tax basis and part taxable.
The only way to take out all of the after-tax basisis to cash in the total value of all of yourIRA accounts.2010-11-22 14:51, By: Gfw, IP: [220.127.116.11]
L3: After Tax DollarsA couple ways to recover all your tax basis per Form 8606 without using the pro rate rules until the IRA is exhausted:
1) Convert all your TIRA, SEP or SIMPLE IRAs to a Roth IRA.
2) If still working and current employer plan will accept IRA rollovers, roll the pre tax balance in your IRA into the employer plan, leaving behind ONLY your basis per Form 8606. You can then either distribute that basis from the IRA tax free or better yet, convert it to a Roth IRA tax free.
Otherwise you will need to file the 8606 every year you take a distribution, but this is no big deal if you are using the same tax program and preparer because their tax program will export the data from the prior year 8606 into the current year file each year. 2010-11-22 21:59, By: Alan S., IP: [18.104.22.168]
L4: After Tax DollarsThere is aproblem with converting your accounts to a Roth: Tax-free distributions don’t start until 5-years after making the conversion. Point: The year of conversion goes back to Jan 1 of the year of conversion. You get credit for one whole year even if you convert on 12-31-20XX.
Separating out pre-tax and post-tax dollars from an IRA as Alan suggests is a new one on me. Not to say it can’t be done, but I would want to see the documentation to support this.
Jim2010-11-22 22:52, By: Jim, IP: [22.214.171.124]
L5: After Tax DollarsFollowing is the portability chart for 2010 showing which plans can be transferred and into which plans they can go. Note for traditional IRA accounts, they can be transferred into qualified plans that will accept them (optional for the plan), but ONLY the pre tax IRA balance can be accepted by the qualified plan (see the footnoteinthe chart). While the taxpayer does not want the after tax balance (8606 basis) going to these plans, the plans themselves risk disqualification or other sanctions if they acquire after tax IRA dollars. Therefore, many plans will only accept transfers from rollover IRAs, thinking that there is less chance of getting after tax money from those types of IRAs. It is not easy to complete these rollovers, but it CAN be done in many cases:
With respect to the Roth conversion, I should have stated that Roth conversions are not advisable in many situations, and therefore converting only to recover the basis is NOT a good idea UNLESS the conversion also meets the other long term needs of the taxpayer. But with everything else being equal, the higher % of basis one has in their TIRA, the more beneficial the conversion will be; but be sure that the other considerations are weighted appropriately before acting.
2010-11-23 00:23, By: Alan S., IP: [126.96.36.199]
L6: After Tax DollarsSorry Alan, but you cannot convert ONLY after-tax or non-deductible IRA or retirement plan contributions to a ROTH IRA, and bypass the taxation proratioon.
As stated in another response, all transfers, rollovers, or conversions from any IRA, SEP IRA, or SIMPLE IRA must prorate each distribution for the non-taxable ration as follows :
TOTAL NON-DEDUCTIBLE OR AFTER TAX CONTRIBUTIONS / TOTAL IRA, SEP IRA, AND SIMPLE IRA BALANCES as of the preceding 12/31. In effect what happens is that this ratio is the amount of EVERY distribution that you would report as non-taxable over the life of your IRA. For example, if you had $ 50,000 of after tax or non-deductible contributions, and your IRA balances were $ 500,00 as of 12/31/2009, then 90% of any 2010 distributions would be taxable, and 10% would be tax-free. Nor really the result you expected.
Another list-serve participant contacted me offline on the similar issue because he had converted ONLY his after-tax contributions to his 401-K. He had`done this on the “advice” of Fidelity. Subsequently, he saw a different posting on Fidelity that indicated that this could not be done.
There are usually2 solutions to this situation, if someone has already done this :
1. Reverse the process, and transfer the money back to the original account in a trustee-to-trustee transfer. This is technically called “recharacterization”. However, it must ahvebeen done by 10/15/2010.
2. Therefore, the only other approach is to take advantage of the 2010 “one-time-offer” to make a ROTH IRA CONVERSION without any limitation on your AGI. ( Usually there has beeen a $ 100,000 AGI limit to be eligible to do ROTH CONVERSIONS.) However, in addition, 1/2 of any ROTH CONVERSION in 2010 will AUTOMATICALLY be included in INCOME in 2011, and 1/2 in 2012 – subject to the “non-deductible / after tax ” proration. This will work extremely well for anyone planning to be retired in 2011 or 2012, or whose income or joint income will be lower. If applicable, you can ELECT to have the entire income reported in 2010, subject to the same proration. This also works well for anyone earning over $ 166,000 on a joint return who would not otherwise be permitted to make a ROTH CONTRIBUTION in 2010.
If you were caught in this misinformed transaction, get to a qualified tax specialist ASAP. If you did it on the advice of some “expert”, contact them about compensating you for any and all fees, penalties, interest, or professional advice to straighten out the mess that they created. And after it is resolved, then report the situation to the branch manager or higher authority, unless you did that initially in order to get the comapany to “pick up the tab”. I doubt that you can get them to also pay the tax, but if you are subject to the 10% early distribution penalty under 59 1/2, then definitely go for that also.2010-11-23 03:42, By: dlzallestaxes, IP: [188.8.131.52]
L7: After Tax DollarsAlan’s chart does not include the provisions of the recent SMALL BUSINESS JOBS ACT OF 2010. It now allows “401-k pre-tax contributions to be rolled into a ROTH IRA”. But all that this did was to consolidate the previous stupid IRS requirement that you had to roll the 401-k into a traditional IRA, and then turn around the next day and roll over from the Traditional IRA to the ROTH IRA.2010-11-23 03:52, By: dlzallestaxes, IP: [184.108.40.206]
L7: After Tax DollarsDLZ,
With respect to this comment you posted to Alan:
Sorry Alan, but you cannot convert ONLY after-tax or non-deductible IRA or retirement plan contributions to a ROTH IRA, and bypass the taxation proratioon.
I did not see Alansay what you are mentioning. He made a suggestion in his second option, toroll back the entire taxable portion of the IRA to a qualified plan, (if your employer would allow it) thus leaving only the after tax value left in that IRA, which he said you could then convert to a Roth IRA tax free. Since qualified plans do not allow after tax money added to them, this sounds like it would work. My money is on Alan for now, because I cannot really recall an instance where Alan posted something and then had to retract it, or was shown to be wrong. KEN2010-11-23 04:47, By: Ken, IP: [220.127.116.11]