IRA distributions when there are after-tax and pre-tax

[30Rock]

We have a situation where force out amounts from qualified plans were rolled over to a non-Roth IRA and the rollover contained after-tax amounts and pre-tax amounts. When the IRA owner later takes a distribution, how does this get tax reported on the 1099? Thank you!

[Bill Presson]

You need to have it fixed now and not wait for some distribution later.

[30Rock]

What I want to know is if the IRA custodian reports that the taxable amount is not determined and it is up to the IRA owner to calculate the taxable amount using the pro-rata formula/rule - i.e. Total Basis divided by the balance in all Traditional IRA's/SEP/SIMPLE as of 12/31 of the distribution year = % x all IRA distributions = Tax Free amount and the balance is taxable and reported on the 1040. Or, does the IRA custodian do something else? Thanks!

[Bill Presson]

You need to ask the IRA custodian what they do. 
 

But I still think you fix the problem and avoid how things are reported later on. 

[Appleby]

On 6/25/2024 at 5:43 PM, 30Rock said:

We have a situation where force out amounts from qualified plans were rolled over to a non-Roth IRA and the rollover contained after-tax amounts and pre-tax amounts. When the IRA owner later takes a distribution, how does this get tax reported on the 1099? Thank you!

The IRA custodian does not and is not required to track basis ( after-tax) amounts. Therefore, the custodian must report it as a taxable distribution, but check the 'taxable amount not determined ' box. The tax-preparer must then file IRS Form 8606 to show how much of a distribution is taxable vs nontaxable. Generally, the distribution would include a pro-rated amount of pre-tax and after amounts- based on the aggregate balance of all the individual's traditional IRAs, SEP IRAs and SIMPLE IRAs.

[MDCPA]

On 6/26/2024 at 10:13 AM, Bill Presson said:

You need to ask the IRA custodian what they do. 
 

But I still think you fix the problem and avoid how things are reported later on. 

I agree. Only pre-tax amounts are eligible for rollover from a qualified plan to a traditional IRA, i.e. pre-tax IRA. After-tax amounts can be converted to Roth by rolling over to a Roth IRA. But under no circumstances are after-tax amounts in a qualified plan eligible for rollover to a traditional IRA.