Commingling of before and after tax IRA money | Ed Slott and Company, LLC

Commingling of before and after tax IRA money

Hi all, I'm new here, glad to be part of the group. I have a question about the ability or inability to commingle before and after tax money. I have a client that has about 400k in an IRA that was a combination of rollovers from various employer based plans, both 401k and 403b. At one company he also bought company stock in a separate IRA, I never knew exactly what the status of this account was exactly and did a like-kind trustee-to-trustee transfer to my brokerage when I took over the account as he had no interest in selling the stock at the time. Just this past year he decided to sell the stock and the initial plan was to transfer it into his current IRA. The problem was, he and his wife swore that at least some of the stock was after tax money. For that reason I held off transferring the money until he did his due diligence. This proved to be a chore as everyone that was at the company when he was there is gone and the transfer agent wasn't much help either. Finally, about a month ago we moved it figuring that if we couldn't prove that the account wasn't pre-tax money, the IRS probably wouldn't be able to find evidence to dispute us if we were wrong. I went ahead and did the transfer and in an impromptu meeting with them this past Sun., the guy found out that the money WAS after tax money after all. My first reaction was to call TDAmeritrade and have the check entered into a seperate IRA until I could find out EXACTLY what all of the stock is classified as. I called on Mon. morning and made arrangements, but I look this morning and the check hit the initial account at the end of the day yesterday. My questions are will there be any repurcussions from the IRS until I get this money moved out into its own account? The rep I talked to put a note in the computer before the money hit but there was an administrative snafu. What are the rules on before and after tax IRA money can this money be commingled? My guess is no, because some of the money has been taxed before and some of it hasn't. I'd like to get the pre-tax money in with the other pre-tax money if possible, how accurate does the IRS expect me to be? Should I leave this account as is and just invest it from there and not try to identify which shares are which because the paper trail does not seem to be very reliable. Any advice would be greatly appreciated.

Welcome to the group. There is no problem generated by commingling after tax and pre tax money in IRA accounts, however the exact amount of after tax basis must be identified and a Form 8606 filed to report the rollover of after tax funds. This is the same form used to report non deductible TIRA contributions, except that the after tax funds from employer plans that are rolled over should be shown on line 2. The assignment of after tax funds to any particular holding is immaterial, and the total basis is applied pro rata to any distributions taken from any of the TIRA accounts in the future. It appears that securing written confirmation of the after tax amounts should be pursued so that the 8606 figure will be correct. Plan administrators usually show the after tax figure on various statements issued to the participant. If you are familiar with NUA on highly appreciated employer stock, note that the use of NUA is forfeited when the shares are moved into an IRA. Therefore, there is no reason not to diversify out of the shares if you feel the current allocation is excessive. There is time to get the correct after tax amount and the 8606 can be filed with the 2007 return next spring, but get the correct amount to eliminate any guesswork. Plans must keep appropriate records of the breakdown, so this should just be a matter of getting the request into the right hands. When you refer to a "separate IRA" where he bought company stock, was this actually an IRA he maintained or did you mean to refer to a company plan account, possibly an ESOP plan or 401k with a brokerage option? Again, your main concern was the commingling of after tax and pre tax amounts, and that is NOT a problem since all IRA accounts are combined as if one account for tax purposes. Finally, if you are in a state that does not fully protect IRA accounts from creditors, the client's protection would fall under the federal BK Act of 2005. Under that Act, he has unlimited protection in BK for employer plan rollovers, so for a rollover as large as 400,000 it would be best to keep it in a separate IRA account and not commingled with IRA accounts in which he has made regular contributions. Those accounts are limited to 1mm in protection plus inflation adjustment.

Yes, I am familiar with the NUA, but the broker that I took the account off of already rolled the money from the company plan to the IRA so I don't believe that the NUA is still an option for me at this point. That's too bad because according to the client the average price the shares were bought for and the price I sold them for was basically a wash. But again, I don't believe that NUA is an option, if I'm wrong here please correct me. Regarding the commingling between before tax and after tax money just use the 8606. I have no problem here because I do their tax prep also. The problem I DO have is that finding out the exact history of these shares, i.e. EXACTLY how they were bought (even though I was told that they were an after tax purchase by someone at the former co., the clients seem to believe that some were before tax, not knowing the EXACT purchase chronology of these shares makes me rather uncomfortable.) Without knowing this info will make the 8606 preparation difficult to say the least. The client that these shares belongs to earns over $250k/yr in combination with his wife and I don't want to make an advice error because the IRS will not have very much leniency with him. My plan is to get these shares in their own account, separate from the other IRA money until I can get some more accurate substantiation as to their history. After I find this out, if I'm able to commingle these accounts to whatever degree without creating a tax prep hell for both myself and the client that I would love to do that. But again, not being able to get any information before Sunday (we've been looking for a better part of a year), and then getting info that was rather brief, and its accuracy questionable at best at this time, makes me want to investigate the outlook futher before making a final determination and commingling.

Well, there is plenty of time to get the correct info. In fact, since the IRS has been accepting 8606 forms retroactively for years, you really don't even have to file it with the 2007 return, other than just to get it out of the way. The danger would be in overstating the after tax amounts, which the IRS would not appreciate, and typically the after tax amounts in the types of plans these assets came out of are a very small % of the total balance. If 1099R forms are available for past year distributions or rollovers, they could be used as a cross check, since a separate one showing -0- taxable amount would typically be issued for after tax distributions from a plan. That amount would still go on the 1040 on line 16a.

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