Co-mingling before-tax money with after-tax money in a conduit IRA.

[Guest T Cahoon]

One of our retired employees last year had taken his two distribution checks - one represented before-tax money the other check represented after-tax money - to his IRA provider which did not question why one check (before-tax) was made payable to the IRA FBO participant and the other check (after-tax) was made payable to the participant. The IRA provider deposited both checks into the participant's rollover (conduit) IRA. Now comes tax time for 1999 filings and this problem is brought to our attention. I have been attempting to find out what are the consequences of co-mingling two money sources within a rollover IRA. I have yet to come up with a firm answer to this dilemma. A sense of direction would be appreciated.

[Alf]

I agree, although I don't think that the conduit nature of the IRA is affected. The after-tax money is not really "in" the IRA, so she should still be able to treat it as a conduit IRA and roll the money into another plan if she wishes.

[IRC401]

The individual is not allowed to rollover after-tax contributions. What he thought was a rollover is, in fact, a contribution. If he is over the contribution limit, he has an excess contribution and is subject to excise taxes. See IRC 4973 and 408(d)(4).

[IRC401]

The problem is that the after-tax money is "in" the IRA , not as a rollover, but as a contribution, which ruins the conduit nature of the IRA. He needs to get the after-tax money out. Tell the broker that they made a mistake and that they need to reverse it ASAP.