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Michelle writes:

Pixy,

Isn't is also important to keep records of "after-tax" money for when withdrawals are taken later ? The only record I have is from my 401(k) plan where they show the exact amount of after tax money being rolled over to an IRA. The IRA told me they won't distinguish after-tax money on the 5498 form. It will all be tallied as a rollover.


Prior to this year, you could not transfer after-tax money from a 401(k) plan into a traditional IRA. That was always distributed to the account holder in a separate check, and the money was returned to that person free of any taxes or potential early withdrawal penalty. As of the first of this year, though, after-tax monies in a retirement plan may now be transferred into a traditional IRA.

As you point out, when they are transferred to the IRA, it then becomes very important for the owner to keep track of the after-tax money to ensure those funds are not taxed again when withdrawals commence from that IRA. While I have not yet seen the guidance for how this money will be tracked, most in the financial services industry anticipate the tracking will be required via reporting on a form such as Form 8606. You will need to pay attention to IRS announcements this year to see what the final reporting requirements will entail.

Since this is a new ruling in 2002 I wondered why this "after-tax" money couldn't be rolled into a Roth since taxes were already payed. The only answer I've been able to get is that you can't go directly to a Roth, you have to go to an IRA. OK, so if the "after tax" money is in an IRA can I easily roll it into my Roth?

You can't just transfer the after-tax money in a traditional IRA to a Roth. The procedure doesn't work that way. If after-tax contributions have been made to a traditional IRA, then part of every distribution from that IRA (or any other if you have multiple traditional IRAs) will be considered to consist of partly taxable and partly untaxable distributions. A conversion to a Roth IRA falls into that category. For details on that issue, see the discussion beginning on page 32 of IRS Publication 590 (Individual Retirement Arrangements) available for download at http://www.irs.ustreas.gov/forms_pubs/pubs.html.

Regards..Pixy
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