Tracking basis in an IRA with a Rollover of after-tax $

[jevd]

Has anyone seen any information regarding the tracking of the basis in an IRA when after tax dollars are rolled in from a Qualified Plan. The 8606 and instructions don't seem to address the issue.

Thanks for any input.

[Guest Cindyd]

I spent a few hours on this very question and finally asked the IRS. Here is my question and response:

I was wondering if the IRS is planning to revise Form 8606 or is coming up with a new form to help individuals track after-tax contributions from employer retirement plans that are (now able to be) rolled over into IRAs? Thanks much.

"Our offfice is not aware of any forthcoming revisions to Form 8606. Individuals are currently advised on page 6 of the Instructions for Form 8606 to list their nontaxable contributions rolled over from their qualified employers plan on line 2 of Form 8606."

Also, I found this Q&A on www.complianceheadquarters.com:

Traditional IRA - Rollovers, Transfers & Conversions

Question: I rolled over to my IRA a nontaxable distribution from my employer’s retirement plan. When and how do I report this on IRS Form 8606? Do I wait until I take a distribution?

Answer: The instructions to the 2002 IRS Form 8606, Nondeductible IRAs, are not clear on how to report a rollover of nontaxable amounts from a qualified employer plan. Form 8606 is generally filed as an attachment to an IRA owner’s federal income tax return for a year if he/she:

Made nondeductible contributions to a traditional IRA,

Took a traditional IRA or SIMPLE IRA distribution (including distributions converted to a Roth IRA) that included nontaxable contributions, or

Took a Roth IRA distribution.

Part 1, Line 1 of Form 8606 reports any current year regular traditional IRA nondeductible contributions but not rollover contributions of distributions from qualified employer plans. The remainder of Part 1 calculates the taxable portion of an IRA owner’s traditional IRA or SIMPLE IRA distributions.

The instructions to Form 8606 for 2002 mention reporting nontaxable rollover amounts on Line 2 of Part 1 only as an adjustment to basis previously reported on an IRA owner’s last filing of Form 8606.

If an IRA owner has never filed Form 8606 this is a puzzling instruction. However, the nontaxable rollover amount should be reflected in basis to properly determine the taxable amounts of future distributions.

Conservatively, an IRA owner could enter his/her nontaxable rollover amount in Part 1, Line 2 of the rollover year’s Form 8606 even if he/she had never filed Form 8606 in the past. An alternative would be to wait until the first distribution year and enter the nontaxable rollover amount then. It may be better for an IRA owner to establish the nontaxable balance as soon as possible.

It is possible the IRS will clarify the instructions for Form 8606 when the 2003 version is released later this year. If not, an IRA owner should check with a tax professional for the best way to report nontaxable rollovers from qualified employer plans. (posted 11/26/03)

[jevd]

Thank You.

I believe that the basis should be established as soon as possible and I also would hope the IRS would resolve this shortly.

Thanks again.

[jevd]

I went back and read the instructions again for Line 2 and it would appear that you include that non-taxable basis on line 2 without further explanation.

I assume then that it could be reconciled with the 1040 reporting of the Rollover on the 1040 however there is no difference in reporting the rollover of taxable v non-taxable amounts.

[Guest DLombardi]

According to the 1099-R instructions, the releasing plan should show the amount of cost basis included in the rollover in box 5. That should give the participant the amount to include as basis on line 2 of the Form 8606 he files for his IRA.

Also, I just took a look at the Form 8606 instructions for line 2. It now says that if you rolled over any nontaxable part of your qualified employer plan to a traditional or SEP IRA, you should include the nontaxable part of the rollover on line 2.