Question

Traditional IRA with both pre-tax and post-tax money

Forum|Forum|3 years ago
December 8, 2022
1 reply
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Hi,

I ran into the pro-rata rule for tax year 2021 when I 1/made non-deductible IRA contributions and converted all of them to Roth IRA and 2/converted my 401k from my previous employer to a traditional IRA account. I didn't know about the "mixing coffee and cream" part last year - I paid additional tax on the "taxable amount" for the Roth conversion, and now part of my rollover IRA in 2/ is considered “post tax” money.

I am thinking of leaving both "post tax" money and "pre tax" money in traditional IRA. May be an ignorant question, but when it comes to retirement and distribution of IRA, how do I know whether I am withdrawing the "post tax" portion or "pre tax" portion? Would Fidelity keep this information and figure out my appropriate tax rate then? Or would I figure this part out when I file my taxes?

Thanks in advance!

M

Mike9241

look at form 8606. you lump all IRA's, SEPs and Simple IRAs together. similarly, your tax basis would be the sum of the tax basis in each of these accounts

this can be an oversimplification but it shows the general principals

assume you have tax basis in IRAs of $10K. at year-end, you have other similar retirement accounts with a fair market value of $100K (assume zero tax basis). during the year you take a $20K distribution. the account from which it comes doesn't matter. the non-taxable portion is the distribution amount of $20K distribution divided by the $100K FMV times your basis of $10K meaning $2k isn't taxable and $8K is. the $2K of basis used reduces your basis for next year to $8K

it's your responsibility to keep track of tax basis and best to file form 8606 each year to show your tax basis even if no distributions are taken.

fanfare

Employee

you don't file 8606 if nothing has happened in that year.

IRS wants you to keep copies of all 8606 forms forever, in your tax records cabinet.

M

Mike9241

and there are those that lose them after a while. in moving or cleanouts. it's happened to a couple of clients I began to represent long after they stopped making non-deductible IRA contributions and since IRS had no record of those old filings it was an expensive pain for those taxpayers.