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Rolling over Traditional IRA with a twist...

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  • Rolling over Traditional IRA with a twist...

    I have a Traditional IRA (IRA-1) that I want to rollover, either into another Traditional IRA (IRA-2) or into my 401-K account.  The wrinkle is that all of the contributions to IRA-1 were non-deductible, so all of the basis is after-tax and all of the earnings are pre-tax.  From reading IRS Pubs 590-A, 590-B, and Notice 2014-54, my understanding is that the earnings could be directed to a Traditional IRA and the basis directed to a Roth IRA.  I've read some online discussions that the basis could even be put into a regular savings account, i.e., as a return of the original (after-tax) investment.  I'm interested in this last point because it would help with college funding.

    Any thoughts on doing this?

     

  • #2
    Update:

    I found an answer here - https://www.irs.gov/retirement-plans/rollovers-of-after-tax-contributions-in-retirement-plans.  This states clearly that you can roll all the pretax amounts to an IRA or retirement plan, and all the after-tax amounts to a separate destination, like a Roth IRA.

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    • #3
      IRS notice 2014-54 only applies to after-tax balances in defined contribution plans (401k, etc...), not traditional IRAs.

      Traditional IRA -> Roth conversion is always required to be pro-rata.

      The only way to isolate non-deductible basis in a traditional IRA is to rollover the pre-tax amount to a 401k. This leaves only the non-deductible basis to convert to the Roth IRA.

       

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      • #4
        Okay, so I could roll the pretax portion of the IRA to my 401-k and convert the after-tax portion (basis) to a Roth.

        Based on language in Pub 590-A (Chapter 1, "Partial rollovers") and 590-B (Chapter 1, "Additional 10% tax"), I believe I could also simply extract the after-tax portion, without tax or penalty.  Do you agree?

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