Rollover IRA Impact on Non-Deductible IRA

[Marc]

About a decade ago I funded a non-deductible IRA for two years with $12K of after-tax funds. (I carefully have not set up any other IRAs except a Roth IRA.) I totally emptied that account this year, my first year of retirement.

I have also begun distributions from my 403(b) account (all accounts at Fidelity) but have found the rules very limiting (e.g., I need to get notarized signature of my wife for each distribution). I was going to establish monthly distributions from 403(b) only to find out I would have no choice on which funds they would come out of; it would be pro-rated. So, I thought about setting up a rollover IRA transferring around $150K of FXAIX to FRZOX and then later transferring bond funds from 403(b) to rollover if I needed to rebalance.. However, is there any way of doing that without triggering the pro-rating of my $12K from non-deductible IRA? Will I have to wait until next year to even establish the rollover account let alone funding it? I don't want to live with an accounting nightmare for 30 years when it can be avoided.

thanks,

Marc

 

[cathy63]

Yes, you should wait until next year to do the rollover. From the IRS' perspective, all IRAs are added together and treated as a single account and the taxable portion of a conversion is calculated at the end of the year.

It's not exactly an accounting nightmare to have mixed pre- and post-tax funds, especially if you use the same tax software to do your own taxes every year; but you would end up paying more tax this year as more of your rollover would be taxable and you'd have to do the same calculation for every future withdrawal or rollover from the IRA.

 

[Alan]

I was in a similar position the first year we retired. I converted my deductible IRA that year and waited until the following year before rolling over my 401k to an IRA so that I would have a zero basis going forward.

 

[bingybear]

However, is there any way of doing that without triggering the pro-rating of my $12K from non-deductible IRA? Will I have to wait until next year to even establish the rollover account let alone funding it? I don't want to live with an accounting nightmare for 30 years when it can be avoided.

I think Alan has it right, roll the offending one to a roth (or distribute) so the tax basis is 0 going forward. Then do the 403 to IRA rollover the next year.

That said, I have had tax basis since the 90's and it really is not all that bad assuming one is using a decent tax program. Care must be taken when switching programs to make sure all your data copies over. But this is true for all data. form 8606 has all the calcs. The math is simple even by hand.

I've been doing roth conversions for the last several years with no issues. It is one more thing to remember... but not complex.

 

[Marc]

Thanks for the replies. The tax years where I filed the 8606 were done by company accountants (no data files) and later years are done with TaxAct. I think I will just defer rollover until next year (I think I can open the rollover account just not fund it this year) and be done. One additional benefit of this plan is if funds are left over at end of year (i.e., still within 22% bracket) then I can easily do Roth conversions.

Again, thanks for the replies,

Marc

 

[bingybear]

Thanks for the replies. The tax years where I filed the 8606 were done by company accountants (no data files) and later years are done with TaxAct. I think I will just defer rollover until next year (I think I can open the rollover account just not fund it this year) and be done. One additional benefit of this plan is if funds are left over at end of year (i.e., still within 22% bracket) then I can easily do Roth conversions.

Again, thanks for the replies,

Marc

Do what you want. It is just one number that needs transferred (per taxpayer). If you have not done non-deductible contributions or done or converted or taken a distribution since the company did your taxes, they the number (dollar amount of basis) should be on the 8606 from that time. So those tax forms should have the data you are looking for.

 

[Marc]

Do what you want. It is just one number that needs transferred (per taxpayer). If you have not done non-deductible contributions or done or converted or taken a distribution since the company did your taxes, they the number (dollar amount of basis) should be on the 8606 from that time. So those tax forms should have the data you are looking for.

It is not just the paperwork; it is the taxes. I have managed income this year so that I could take advantage of 0% capital gains tax this year. To do that, I needed the $12K from my non-deductible IRA to be non-taxable. I will be within $100 of $101,400 as it is; don't want to take any other chances.

Marc

 

[cathy63]

It is not just the paperwork; it is the taxes. I have managed income this year so that I could take advantage of 0% capital gains tax this year. To do that, I needed the $12K from my non-deductible IRA to be non-taxable. I will be within $100 of $101,400 as it is; don't want to take any other chances.

Marc

Yes, this is exactly why you need to wait until next year. If you move $150K of after-tax contributions into your tIRA now, then you would be taxed on the previous $12K conversion that you did earlier in the year as if you had a $162K IRA that had a $12K basis*. So essentially you would have a $12K Roth conversion of which 12/162 is non-taxable and you'd be left with an IRA of $150K which has a basis of $12K*150/162. You'd end up adding over $11K to your taxable income this year.

*I'm ignoring any growth on the original $12K, for which you will pay tax this year, and on the $150K that might occur after the rollover but before the end of the year; but in the real calculation those amounts would matter.

 

[bingybear]

It is not just the paperwork; it is the taxes. I have managed income this year so that I could take advantage of 0% capital gains tax this year. To do that, I needed the $12K from my non-deductible IRA to be non-taxable. I will be within $100 of $101,400 as it is; don't want to take any other chances.

Marc

I'm not trying to tell you to convert this year. you said

I don't want to live with an accounting nightmare for 30 years when it can be avoided.

. I'm trying to help you understand that it is not all that complicated and where you can likely find the data in your previous tax forms.

At some point you will likely have to deal with it at least once or ignore your tax basis --- treat it as zero. You would just loose the tax basis benefit.

We ended up with about 70k tax basis between the two of us mainly due to an employer that allowed extra contributions for the 401k above the deduction limits.

Do what is right for your tax and income planning. Just don't get overwhelmed by the tax basis prorating. Its easy enough and most tax programs do most of the work.

pax