Roth Conversion & Aggregating Conduit IRAs w/ "POST-TAX" assets

[Guest Richard Plant]

------ Are Conduit IRAs "aggregated" along with with all other Traditional IRA assets when converting to a Roth IRA? --------

- An individual converts 100% of all her Traditional IRAs assets ($10K) to a Roth IRA in January 2004.

- All contributions to her traditional IRA were pre-tax.

- A few weeks later her employer goes out of business and mails her 401(k) distribution paperwork.

- She distributes 100% of the $90K in her 401(k) to a Conduit IRA.

- The rollover distribution consists of 50% post-tax assets & 50% pre-tax assets.

- A few weeks later she finds a new job and rolls the Conduit IRA into her new employer's 401(k) plan as "plan assets" (not as a "Deemed IRA").

Does the she have to aggregate both the Traditional IRA assets and Conduit IRA assets in 2004 for purposes of determining the taxable portion of the conversion?

What if she simply left the assets in the Conduit IRA through the end of 2004 - would that make a difference with respect to the aggregation rules for determining the taxable portion of the conversion?

[mbozek]

I thought after tax contributions cannot be rolled from an IRA to a qualified plan. IRC 408(d)(3)(A)(ii). Why would anyone want to put 45K in AT money in a qualified plan where the earnings are taxed at marginal rates instead of a regular account with a tax on dividends and capital gains of 5/15%?

[Appleby]

I agree with MBozek that after tax assets cannot be rolled from an IRA to a QP.

Regarding the tax treatment, AFAIK (I learned that word from Derelict ), the tax treatment would be pro-rata. It would seem to make sense that 100 % of the Roth conversion would be taxed, since when the conversion occurred, there was no other IRA balance. However, I am not aware of any provision that allows for separate tax treatment if assets are rolled over after a distribution/conversion occurs Vs tax treatment of assets that were distributed/converted with no subsequent rollover. For instance, assume the traditional IRA balance consisted of only post-tax assets at the time of conversion, and pre-tax amount was rolled over after the conversion occurred, it would seem logical that the conversion would be tax-free- but the instructions for filing Form 8606 does not ask for any information that makes a distinction for assets rolled over after the distribution/conversion. Therefore it appears that the conversion would be taxed pro-rata.