After-ax Money in IRA Rollovers from Workplace Plans

[Guest David Hammond CISP]

Hi Everyone,

EGTRRA provisions now permit IRA's to accept after-tax money residing in workplace retirement plans to be rolled over into Traditional IRA's. Apparently these monies do have to be "separately accounted" within the IRA that accepts them.

While not an everyday event, it is potentially quite common.

When such after-tax monies are subsequently distributed from the IRA which receives them, has any official guidance been forthcoming on how these funds are to be recovered?

First out? Pro-rated with other taxable IRA funds? (I was unoffically told to expect pro-rated treatment.)

Looking for a citable source.

Insight would be appreciated.

Cordially,

David Hammond

[mbozek]

After tax money in an IRA is considered distributed on a prorata basis in preportion to the total assets of all IRAs of the owner. See IRS Pub 590. This accounting problem is why it is better to recieve the a/t money since there is no tax and only roll over the pre tax money to an IRA. Why would a participant want to tie up after tax money not subject to income tax in an IRA, have the earnings taxed at ordinary income tax rates and be be subject to the accounting problem of annual allocation between pre and a/t money?

[JAMES PATRICK]

If the IRA is just the temporary holding vehicle prior to conversion to Roth, that may be a reason.