Pre-1987 / Post-1986 in IRA
Hi there,
I have a client with the following fact pattern and am not sure how to proceed.
-Client rolled about $200k from 401(k) with $10k of pre-1987 after-tax funds and $11k of post-1986 after-tax funds to an IRA about 10 years ago. The existence of these after-tax funds was only discovered this year after client went through some old records (including a stub from the rollover check).
-Client has performed a couple of IRA-to-IRA transfers with this money
-Client has made some Roth conversions with this money (first one was maybe 5 years ago)
-Client began taking RMDs in 2017
-No 8606 has ever been filed
My questions are: Can he still draw his pre-1987 funds from one of his IRAs out as a lump sum without paying taxes? Can (and does he need to) amend previous returns to correct all previous conversions and RMDs to include a return of some after-tax contributions (I heard that you could only amend back about 3 years of returns)? How does he document going forward to claim his pro-rata share of his post-1986 after tax questions.
Thanks!
Permalink Submitted by Alan - IRA critic on Tue, 2019-01-22 16:08
He was supposed to file Form 8606 reporting the 21,000 of IRA basis in the first year he otherwise was required to file Form 8606. Perhaps his conversion of 5 years ago was the first such year, but that year is now closed to amendment for refund purposes. Returns for 2015-2017 can still be amended to add Form 8606, and for the first such year he should show the 21,000 on line 2 and complete the rest of Part I to determine the reduced taxable amount of that conversion and then work forward to later years where the line 14 basis from Form 8606 transfers to line 2 of the next 8606 to be filed. For the first year he files the 8606, he should include an explanatory statement where the 21,000 came from that he is placing on line 2. Note that IF the IRS wants him to file an 8606 for the conversion 5 years back just to show the amount of basis that SHOULD HAVE been applied to that year, which would then be forfeited, they would be technically correct, but I have never heard of them taking that position.
Permalink Submitted by Michael Frontera on Fri, 2019-01-25 16:35
Thank you very much Alan! Do you know if there’s a shot he could still pull out his pre-1987 basis in a lump sum, non-prorated fashion? That was about $10k of the $21k
Permalink Submitted by Alan - IRA critic on Fri, 2019-01-25 17:55
The pre 87 after tax contribution amount can be distributed separately from the 401k plan, but once the funds are rolled into an IRA, they become subject to the pro rata rules just like non deductible TIRA contributions or rollovers of post 86 after tax amounts. Rollovers to a Roth IRA from a 401k were first available in 2008, so starting that year he could have taken a separate distribution of the pre 87 amount and rolled it to a Roth IRA tax free, but until 2010 there was also a 100,000 MAGI limit for doing these rollovers as there was for Roth conversions.
Permalink Submitted by Michael Frontera on Tue, 2019-02-05 14:42
That was very helpful!