IRA Tax Question

[Drake3287]

My wife recently rolled over her past employers 457 account to a IRA now that she's retired from them. When we were setting up the account the Merrill Lynch rep said she could still contribute to this new IRA if she wished. At the time I really didn't think about it but now I'm wondering what happens if she decides to put more money into this IRA which has already been taxed?

All her current 457/IRA money is pre-taxed and of course will be taxable down the road when she takes it out. Let's say she has $250k in pre-taxed money in the account and $100k of already taxed funds, when she takes it out years from now how do they decide which funds are completely taxable vs the funds that was already taxed when she deposited it? Obviously she'll still own taxes on anything she makes off this additional $100k.

 

[RetiredHappy]

If she doesn't have earned income, she cannot contribute into her IRA account.

 

[N02L84ER]

If she had already paid taxes on the 457 money, did she roll it into a Roth IRA? That would have been the cleanest thing to do. If she did not, then she gets to keep track of the "basis" on that money and has to prorate all IRA withdrawals until she empties all IRAs.

 

[RetiredHappy]

If she had already paid taxes on the 457 money, did she roll it into a Roth IRA? That would have been the cleanest thing to do. If she did not, then she gets to keep track of the "basis" on that money and has to prorate all IRA withdrawals until she empties all IRAs.

I read it as these are pre-taxed money.

 

[Al18]

A few years ago, I retired on January 2 and received a final check for unused vacation time. I contributed some of that money to an IRA.

 

[SecondCor521]

All her current 457/IRA money is pre-taxed and of course will be taxable down the road when she takes it out. Let's say she has $250k in pre-taxed money in the account and $100k of already taxed funds, when she takes it out years from now how do they decide which funds are completely taxable vs the funds that was already taxed when she deposited it? Obviously she'll still own taxes on anything she makes off this additional $100k.

As @N02L84ER implied, she gets to keep track of the after tax contributions and any distributions are done on a pro rata basis. See Part I of Form 8606, which is where she would report after tax contributions and calculate the pro rata figures, in particular lines 1 and 12 respectively.

 

[mrfeh]

OP is confusing, and I'm not quite sure what's being asked.

Regardless, it's a good idea to keep pre-tax and post-tax contributions in separate accounts, to avoid just this situation.

 

[Dalton]

There is a difference between a "pretax" account (contributions made before they are taxed, and thus will have the paying of taxes deferred until later, such as a traditional IRA) and "pretaxed" which presumably is what we call an "after tax" (such as a Roth IRA) or "taxable" (such as a brokerage account). Pretax vs pretaxed is a certain point of confusion, which is why we don't generally use "pretaxed".

Are you sure this 457b to IRA rollover was a taxable rollover (i.e. you have to pay income tax on the full amount rolled into IRA), OP? It sounds like your ML rep believes the IRA is a traditional rollover IRA (pretax), but if you paid tax on all the full 457b wouldn't it be in a Roth IRA? I guess I'm saying that hopefully you just misunderstood the term "pretax".

As an example, I had a 401k (traditional, pretax, not Roth type) and moved it to a rollover IRA (traditional, still pretax) and did not have to pay income taxes to roll it over into the rollover IRA. I was still working, so had earned income, and so was allowed to continue to make pretax contributions to this traditional rollover IRA.

 

[Badger]

The first thing that caught my attention was doing business with Merrill Lynch. Years ago they wanted to handle/buyandsell my wife's investment in her 403b. It didn't sound like a good idea when someone told me about "churning". Since there were no other options except for annuities I had the money deposited in a MM account that I would have transferred every few months to a Vanguard IRA. Even then they screwed with her account but didn't benefit from it.
If you have the option to do business elsewhere I would suggest Fidelity or Charles Schwab if you need "face to face" meetings or Vanguard if not. It won't hurt to talk to them.

 

[pjigar]

OP is confusing, and I'm not quite sure what's being asked.

Regardless, it's a good idea to keep pre-tax and post-tax contributions in separate accounts, to avoid just this situation.

You can hold multiple IRA and Roth IRA accounts as well.

Only earned income can be contributed to IRAs.

 

[mrfeh]

You can hold multiple IRA and Roth IRA accounts as well.

Right, which is why there's really no reason I can think of to mix pre and post tax contributions.

 

[cathy63]

OP is confusing, and I'm not quite sure what's being asked.

Regardless, it's a good idea to keep pre-tax and post-tax contributions in separate accounts, to avoid just this situation.

To the IRS, you only have one tIRA account. You have to add all your account balances together any time you do anything with them, so keeping different types of contributions in different accounts does not avoid any particular situation.

Also, if you create a new tIRA account and put after-tax money in it, then all the growth will still be pre-tax money, so there is really no way to keep after-tax money segregated even within a single account.

The one advantage of keeping your rolled-over funds segregated is if you think you may want to roll them over to a new employer account in the future. There are some employer accounts that won't accept comingled funds.

 

[mrfeh]

To the IRS, you only have one tIRA account. You have to add all your account balances together any time you do anything with them, so keeping different types of contributions in different accounts does not avoid any particular situation.

Co-mingling complicates withdrawals. That's all I'm getting at.

Why put both pre-tax and post-tax contributions in the same account, when it can be easily avoided?

 

[audreyh1]

Co-mingling complicates withdrawals. That's all I'm getting at.

Why put both pre-tax and post-tax contributions in the same account, when it can be easily avoided?

That doesn’t really help you. When you withdraw, any post tax basis is applied across all IRAs. It doesn’t matter where you withdrew from.

 

[audreyh1]

The one advantage of keeping your rolled-over funds segregated is if you think you may want to roll them over to a new employer account in the future. There are some employer accounts that won't accept comingled funds.

One major benefit is that when you rollover a 401K into a new IRA it maintains the ERISA protections of your 401K as long as you don’t comingle with other non-ERISA protected funds.

 

[pjigar]

FWIW post-tax money should be always rolled over to Roth IRA. And pretax money should be rolled over to "rollover IRA".

 

[rk911]

For most of our working years we were covered by a qualified pension plan so most of our IRA contributions were post-tax and non-deductible. I kept scrupulous track in a spreadsheet but when it came time to start RMDs it made no difference since 100% of our RMDs go to charity via QCD.

 

[mrfeh]

That doesn’t really help you. When you withdraw, any post tax basis is applied across all IRAs. It doesn’t matter where you withdrew from.

It helps in that you can withdraw from a Roth without any taxes at all.

 

[Drake3287]

Thanks, these comments make sense now. We just got the impression that she could still contribute money into this IRA from our current savings/investments just like people do with other types of investments such as savings accounts or CD's. To be honest we had never even thought about contributing any more money into this IRA until they mentioned it in our meeting. She doesn't plan to return to work ever so it looks like contributing more funds into isn't going to happen.

 

[engineernerd]

That doesn’t really help you. When you withdraw, any post tax basis is applied across all IRAs. It doesn’t matter where you withdrew from.

Yes, I don't think you save yourself any work/calculations by putting already-taxed contributions in a separate tIRA account, since all your tIRA investment returns are considered as a monolithic pile. The time this becomes a headache is when you make withdrawals. You have to calculate what percent of your entire account value your basis (the after-tax dollars) is at the time of the withdrawal, all the rest is taxable. So you are committing yourself in advance to a lifetime of extra calculations.

Someone I know (who is still working) has no balances in tIRAs, and takes advantage of that to do "backdoor" Roth conversions every year. Once a year she contributes already-taxed money (from pay) to a tIRA and immediately does a full Roth conversion from that tIRA. Because the contribution has already been taxed, there is no additional tax due because of the conversion, and because her financial institution makes sure the two transactions happen in quick succession, she doesn't have earnings in the tIRA to create math headaches.

 

[mrfeh]

Yes, I don't think you save yourself any work/calculations by putting already-taxed contributions in a separate tIRA account, since all your tIRA investment returns are considered as a monolithic pile. The time this becomes a headache is when you make withdrawals. You have to calculate what percent of your entire account value your basis (the after-tax dollars) is at the time of the withdrawal, all the rest is taxable. So you are committing yourself in advance to a lifetime of extra calculations.

+1

This is what I was trying to say in my posts, apparently not very clearly.

 

[TheWizard]

...Someone I know (who is still working) has no balances in tIRAs, and takes advantage of that to do "backdoor" Roth conversions every year. Once a year she contributes already-taxed money (from pay) to a tIRA and immediately does a full Roth conversion from that tIRA. Because the contribution has already been taxed, there is no additional tax due because of the conversion, and because her financial institution makes sure the two transactions happen in quick succession, she doesn't have earnings in the tIRA to create math headaches.

I did something like that several years ago when I was working part-time in retirement.
But I just kept newly contributed funds in my tIRA invested in a stock index fund until I topped out at $6500 contributed.

My tIRA grew a bit to around $6600 by that time when I did the rollover to my Roth IRA. So I paid a little tax on that $100 gain. Tax software handled it fine, no headache...

 

[engineernerd]

I did something like that several years ago when I was working part-time in retirement.
But I just kept newly contributed funds in my tIRA invested in a stock index fund until I topped out at $6500 contributed.

My tIRA grew a bit to around $6600 by that time when I did the rollover to my Roth IRA. So I paid a little tax on that $100 gain. Tax software handled it fine, no headache...

Did you end with a zero tIRA balance after the Roth conversion? I'd guess that's what's important, to avoid the never-ending hassle.

 

[TheWizard]

Did you end with a zero tIRA balance after the Roth conversion? I'd guess that's what's important, to avoid the never-ending hassle.

Yes. But because I was retired at the time, with no employer sponsored retirement plan contributions anymore, tax software treated my $6500 contribution as tax deductible, followed by a $6600 taxable Roth conversion, meaning net $100 taxable.
A bit confusing at the time but it worked out okay...