Slott Report Mailbag: Can I Mix Pre-Tax and Post-Tax Money in the Same IRA?

By Joe Cicchinelli, IRA Technical Expert

Follow Me on Twitter: @JoeCiccEdSlott

This week’s Slott Report Mailbag discusses IRA basis and the ever-popular question about Roth IRA and IRA distributions’ tax status. As always, we stress the importance of working with a competent, educated financial advisor to keep your retirement nest egg safe and secure. Find one in your area at this link.

1.

I currently have two Traditional IRAs, which were funded from rollovers from 401(k) and 403(b) accounts, and opened in 2013. I want to contribute to a Traditional non-deductible IRA for 2014 with after-tax funds then convert it to a Roth. My broker says I can’t mix pre-tax and post-tax money in an IRA. But if I file IRS Form 8606 will it show my basis for what I contributed to the Traditional IRA? Can you help?

Michael from New Jersey

Answer:
You can mix pre-tax and post-tax money in the same IRA. It doesn’t matter because under the pro-rata tax rule, all of your non-Roth IRAs are considered one IRA for tax purposes. You cannot convert just your nondeductible IRA contribution to a Roth IRA tax-free because you have other IRA money that contains pre-tax funds. Form 8606 will show your basis but it will also show you how a distribution from any IRA will be taxed. A portion of each distribution will come from your pre-tax dollars and a portion will come from your after-tax dollars.

2.

Good afternoon,

I am 44 years old and rebuilding my primary residence from Hurricane Sandy. To pay off my existing mortgage I am taking out all of my contributions from my Roth IRA and Traditional IRA. I opened my Roth IRA in April 1999 for 1998 contributions and my Traditional IRA contributions were all non-deductible because I contributed to 401(k).

Question: for my Roth, if I take my contributions only as a distribution do I pay any tax? For my Traditional IRA do I just pay the 10% early distribution penalty if I just take out my contributions? And if I take out my full balance on a deceased Beneficiary IRA do I have to pay ordinary income tax? Are all my tax statements correct if I take distributions from all three IRA accounts? I am keeping all gains in the Roth and Traditional IRA.

Answer:
All annual Roth IRA contributions can be withdrawn at any time without tax or penalty. For your Traditional IRA, despite the fact that all of your contributions were nondeductible, you cannot just withdraw those contributions tax-free. The earnings on those contributions are taxable. Under the pro-rata tax rule a portion of any distribution will be from your after-tax contributions and a portion will be from your pre-tax earnings. The 10% penalty will apply to the taxable amount of your IRA distribution. The withdrawal of funds from a beneficiary IRA will be taxable, but no 10% penalty because it’s due to death. In your Traditional IRA and the Beneficiary IRA, you cannot keep all gains in those accounts to reduce or avoid taxes.