non deductible IRA and form 8606

[perinova]

I found a couple of old threads on this subject but I think the rules may have changed.

I was reading that you need to use form 8606 to track basis of a non deductible IRA but that you have to use the total of your IRAs (rollovers etc) to determine the tax free portion. This means that this will follow me for my whole retirement life unless I liquidate all IRAs.

What I am not sure about is: Is it still possible to do a Roth conversion of the non-deductible IRA? (The non deductible IRA is not yet commingled)
If this is not possible I don;t see a reason not to commingle it with the rest.

 

[audreyh1]

No in the sense that the tax free portion is prorated over all your IRAs. So even if you convert just that IRA that originally had non-deductible contributions you will only get the prorated portion as tax free. It doesn’t fix the problem of having to deal with it until all IRAs are liquidated.

The main reason not to commingle IRAs is that rollover IRAs from a 401K retain the original legal protections unless commingled or contributed to after the rollover.

 

[cathy63]

The rules have not changed recently. The IRS considers all of your traditional IRAs to be one giant account. Likewise, they consider all of your Roth IRAs to be one giant account. Every time you convert from tIRA to Roth, you have to add up the total balances of all your tIRA accounts to figure out what portion of the conversion is basis so you can exclude that from taxable income (this is the pro-rata rule).

The only reason I know of to avoid commingling IRAs is if you may have a chance in the future to roll money that came from one employer's account over to another employer's account and the new plan has a provision that requires you to show it was kept separate.

 

[mwilson]

The only reason I know of to avoid commingling IRAs is if you may have a chance in the future to roll money that came from one employer's account over to another employer's account and the new plan has a provision that requires you to show it was kept separate.

Another reason to avoid comingling is bankruptcy protection, which is currently limited to about $1.5M for contributory IRAs but unlimited for rollover IRA and 401(k) accounts.

 

[perinova]

OK.
Thank you both. So I don't see ay reason for me not to commingle while in retirement.
And, although this case does not apply to me (I rolled-over all my 401ks): Do you know if the calculation of the tax free portion include IRAs+401ks assets combined?

 

[gauss]

I found a couple of old threads on this subject but I think the rules may have changed.

I was reading that you need to use form 8606 to track basis of a non deductible IRA but that you have to use the total of your IRAs (rollovers etc) to determine the tax free portion. This means that this will follow me for my whole retirement life unless I liquidate all IRAs.

What I am not sure about is: Is it still possible to do a Roth conversion of the non-deductible IRA? (The non deductible IRA is not yet commingled)
If this is not possible I don;t see a reason not to commingle it with the rest.

To do Roth Conversions of only the nondeductible IRA balances, in the past you would need to "Isolate the Basis" via rollovers of the pretax IRA amount into a 401k that will accept them. At that point you would have 100% nondeductible basis in your IRA and could do the Roth conversion with no tax liability.

I was doing this about 10 years ago for several years. It worked well for me, but I had access to 401k plans that would accept the in-bound rollovers from traditional IRAs. YMMV

BTW I think commingling IRAs vs keeping them distinct is an obsolete strategy that was created in the conduit IRA days. Generally Federal tax law now treats the sum of all your IRAs in aggregate in several ways. Also you can now only perform one indirect (60-day) IRA rollover per year. In previous years that was per IRA, but that door has since closed.

Having separate IRAs may be useful if you were to setup a 72(t) plan to gain penalty free access to IRA funds prior to age 59 1/2. But you could set that up if and when you are ready to design/execute a 72(t) plan.

A few years ago there was a bill that would have placed restrictions on the ability to Roth Convert funds that contained nondeductible amounts. I believe that bill never passed and I have resolved (ie roth converted) all my nondeductible contributions since then.


-gauss

p.s. "Isolating the Basis" was the term used over at fairmark.com that discussed this in detail. Unfortunately they now seem to have removed the old forum articles.

 

[cathy63]

OK.
Thank you both. So I don't see ay reason for me not to commingle while in retirement.
And, although this case does not apply to me (I rolled-over all my 401ks): Do you know if the calculation of the tax free portion include IRAs+401ks assets combined?

Assets that are still in a 401(k) are not included in the basis calculations for your tIRA.

 

[LateToFIRE]

I curse the day my financial advisor suggested contributing to non-deductible IRA's. The $ amount is negligible, but will be a royal PITA for the rest my existence. At least DW was able to backdoor Roth convert hers.

 

[SecondCor521]

I curse the day my financial advisor suggested contributing to non-deductible IRA's. The $ amount is negligible, but will be a royal PITA for the rest my existence. At least DW was able to backdoor Roth convert hers.

You can always ignore the pro rata rule and just treat it all as deductible IRAs. You'll overpay on taxes by a "negligible" amount, but the IRS won't mind if you do.

 

[audreyh1]

I curse the day my financial advisor suggested contributing to non-deductible IRA's. The $ amount is negligible, but will be a royal PITA for the rest my existence. At least DW was able to backdoor Roth convert hers.

Yes. Unfortunately when I retired, conversion to Roth was not an option for me. Income restrictions were removed in 2010. I had a non-deductible IRA. But I couldn’t convert it to Roth and then when I did roll over my 401K to another IRA I was stuck with them being lumped together and prorated.

However, TurboTax takes care of the forms and carries over info, and as long as I’m using TurboTax it will keep up with it.

Otherwise you could always blow it off which I threatened to do many years ago ha ha.

 

[RE2Boys]

I retired 23 years ago and due to the pro-rating of the basis on the Form 8606, I have yet to roll over my 401k to a tIRA so I more quickly regain my basis. The only way to get rid of the 8606 is to completely emty out my tIRA. Taking RMDs so each year I file an updated 8606. I don't understand why folks get all upset about the 8606, but then again, my second career for past 23 years is as a tax preparer.

 

[LateToFIRE]

You can always ignore the pro rata rule and just treat it all as deductible IRAs. You'll overpay on taxes by a "negligible" amount, but the IRS won't mind if you do.

Yes. Unfortunately when I retired, conversion to Roth was not an option for me. Income restrictions were removed in 2010. I had a non-deductible IRA. But I couldn’t convert it to Roth and then when I did roll over my 401K to another IRA I was stuck with them being lumped together and prorated.

However, TurboTax takes care of the forms and carries over info, and as long as I’m using TurboTax it will keep up with it.

Otherwise you could always blow it off which I threatened to do many years ago ha ha.

Could be too late to ignore as I've already been filing the form 8606's for years now. Knowing the IRS, they probably do care, even if I'm paying extra.

 

[Alan]

OK. Do you know if the calculation of the tax free portion include IRAs+401ks assets combined?

401ks are not included in the calculation which is why I kept my 401k for a year after retiring while I converted my non-deductible IRA. I then rolled over my 401k to an IRA and was able to do Roth conversions from an IRA with no basis.

My wife retired a few years before me and rolled her 401k into her IRA, so after I retired we had about 10 years of converting her IRA with a basis until it was finally all done.