Non-deductible IRA transfer | Ed Slott and Company, LLC

Non-deductible IRA transfer

We have a potential client who has a non-deductible IRA that he wants to move from Janus to us.

#1) The funds will not transfer in kind - so they will be liquidated at Janus and then transferred to us to a brokerage account. Will all the accounting of the basis vs earning transfer with it and do we transfer it to an IRA brokerage account?

The same client has a ROTH with Janus that will be also transferring to a ROTH. No problem.

IF the client wants to purchase an annuity with the Non-deductible IRA funds once it transfers in to a brokerage account with us - can it go to an IRA annuity or should it go to a ROTH annuity?

Kind of a loaded question(s).

  • The client must keep track of their IRA basis by filing Form 8606 reporting any non deductible contributions made each year. This basis floats over all non Roth IRA accounts and is not locked to any one account. The IRA custodian has no idea of what the basis amount and does not care since all IRA distributions are reported as 100% taxable on Form 1099R. The client then overrides the taxable amount with their tax return by filing Form 8606 for all distributions. Line 14 of the latest 8606 will show the amount of basis carried into future years.  Short answer is that nothing needs to be done with respect to this transfer. However, if client has not filed Form 8606 properly in the past, they need to reconstruct their records to determine if they need to file the form to bring their basis up to date. SImilarly, the client must also keep track of their Roth basis either manually or with a spreadsheet. There is no form to file for this until client takes a Roth distribution.  If client has been using the same tax preparer for years, then their professional tax program should capture and automatically track either TIRA or Roth IRA basis.
  • Any TIRA basis recorded on Form 8606 will remain in place and apply to any TIRA annuity as well as the current TIRA. That means all distributions will be partially non taxable and if client has only a TIRA annuity, any distributions must be reported on Form 8606, same as if the annuity was not purchased. However, if client ever annuitizes the IRA annuity, there will no longer be a year end account balance to enter on the 8606 and the IRS has not issued guidance on handling this.  Apparently very few IRA owners annuitize their annuities.
  • If client wants to purchase a Roth annuity with TIRA funds, that is a conversion. The TIRA basis on Form 8606 would be applied to the conversion, making the conversion partly non taxable. Depending on how much is converted to the annuity, there will be a reduced basis remaining for any TIRA accounts, and that would show on line 14 of Form 8606. The amount of the conversion would automatically become Roth IRA conversion basis. For all client's Roth IRAs, annuity or otherwise, client must keep track of their regular contribution basis and their conversion basis separately.  Once the Roth is fully qualified (5 years and age 59.5), then all Roth distributions are tax free and basis no longer matters and therefore no longer needs to be tracked. Therefore, things are simpler if clients do not withdraw from their Roth IRA until it is qualified and tax free.
 

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