Post tax rollover monies

[Guest Penny40]

Qualified monies rolled into Traditional IRA (post & Pre tax).

Client wants to take a distribution of the post tax monies as they did not want this portion rolled into an IRA. Will this be taxed under ordinary income again? Or is there a special way for either the client or the custodian to report this?

THank you

[Mike Preston]

I didn't think that traditional IRA's allowed rollover of after-tax monies. Sounds like you might have had a rollover that wastn't totally rollable. If that is the case, the non-taxable amounts are most likely to be treated as individual contributions, subject to the 6% excise tax, each year (pyramid-style) for those amounts that couldn't be contributed otherwise.

Probably not what you wanted to hear.

Maybe somebody else will tell me that the law has been changed and after-tax amounts can be rolled to traditional IRA's.

[MGB]

Yes, Mike, EGTRRA changed the law to allow after-tax rollovers.

Sorry, I don't work with IRAs, but I would presume any distribution from the IRA now would be pro rata after-tax and taxable amounts. If they are under 59-1/2, this will also invoke the 10% additional tax. Of course, perhaps the law has changed on this one, too, but I doubt it.

[Mike Preston]

Doh. I have a chart that says exactly that, too. Of course, if the rollover took place in 2001, it wasn't allowed, but I'll assume that this is a recent event and that the IRA was properly amended, if necessary, by the IRA custodian, to allow after-tax monies from qualified plans.

So, in answer to Penny's question, no, the money won't be taxed again. However, I've always thought that distributions from qualified plans that held post-1986 only after tax monies had to be recognized in income on a pro-rata basis. See IRS Notice 87-13 or 87-16 (I always forget which one, but it is one of those).

Wouldn't the same thing apply to IRA's now?

My bet is that the custodian's staff is grappling with the correct way to fill out 1099's at this very moment. I haven't had much success with IRA custodians in the past doing anything other than coding 1099's as "fully taxable". So, even if it isn't fully taxable, I don't see how the IRA custodian can determine how much of it is supposed to be taxable. Hence, I think what you are going to be stuck with is accepting whatever the IRA custodian dishes out and just documenting your tax return so that if audited you can refute the taxability of a portion of the distribution.

[Mary Kay Foss]

The custodian is not responsible for determining how much of a distribution from an IRA is taxable. It's totally up to the account owner. Also there is a penalty for overstating basis in an IRA so good record keeping will be essential.

Before after tax funds could be rolled one of my clients was able to have the after tax portion refunded with no hassle from the custodian. If it's a pre-2002 rollover, I hope that will work.

Form 8606 has been used to calculate the taxable vs basis recovery portion of an IRA distribution. Logically the IRS will update this to handle the new law. Unfortunately, my version of logic and that used by forms designers doesn't always coincide.

Good luck

[Guest Penny40]

Thanks, this was really helpful!!