Life and Death Planning for Retirement Benefits

Chapter 2: Income Tax Issues

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now has an IRA with $20,000 of after-tax money in it, and each distribution he takes during retirement will contain a proportionate amount of nontaxable after-tax money (see ¶ 2.2.08 for how to compute that). There would not appear to be any way for him to retroactively take advantage of the Notice 2014-54 rule. The only hope for him is if (despite being retired from Oldco) he still participates in a qualified plan that accepts rollovers; see ¶ 2.2.09 (A). 2.2.06 Participant’s basis in a traditional IRA Here is a list of the ways that after-tax money can get IN to an IRA. A participant who acquires all (or part) of his ex-spouse’s IRA in a divorce pursuant to § 408(d)(6) will thereby also acquire all (or part) of the ex-spouse’s basis. For a beneficiary’s basis in an inherited IRA, see ¶ 2.2.07 . For how the after-tax money (basis) comes OUT of the IRA, see ¶ 2.2.08 – ¶ 2.2.10 .  Nondeductible “regular” IRA contributions . A participant may have after-tax money in his IRA as the result of nondeductible contributions made to the account in 1987 or later years. See § 408(o) , added by § 1102 of TRA ’86.  Rollover of after-tax money from a QRP after 2001. § 401(a)(31) and § 402(c)(2) permit nontaxable as well as taxable amounts to be rolled over from a QRP to a traditional IRA after 2001; see ¶ 2.6.02 (H). A participant is required to file Form 8606 for any year in which he either: makes a nondeductible contribution to an IRA (presumably including a rollover contribution that contains after-tax money); converts any part of an IRA to a Roth IRA (¶ 5.4) ; takes a distribution from a Roth IRA; or takes a distribution from a traditional IRA at a time when he had after-tax money in any of his traditional IRAs. Form 8606 is attached to the individual’s Form 1040, but may be filed separately if the individual is not required to file Form 1040. Part of the information reported on Form 8606 is the participant’s basis in his traditional IRAs. To determine a client’s basis in his traditional IRAs, therefore, theoretically, you need only look at his most recent Form 8606. Whether everyone who is supposed to file this form has actually done so, or has completed the form accurately, is another question. 2.2.07 Beneficiary’s basis in an inherited IRA An inherited IRA ( ¶ 4.2.01 ) is subject to various additional or different income tax considerations, though IRS publications, tax forms, and instructions do not always make that clear. See, in addition to this section, ¶ 2.1.07 (C) (effect of plan loan at participant’s death), ¶ 4.2 (rollovers and plan-to-plan transfers of inherited plans), and ¶ 4.6 (income in respect of a decedent). For authority for the following statements, see Rev. Proc. 89-52, 1989-1 CB 632, § 3.01. See also IRS Publication 590 (2009), Individual Retirement Arrangements (IRAs), “What if you inherit an IRA?,” “IRAs with basis,” p. 20. Neither Form 8606 nor the instructions to that Form  Excess IRA contributions not returned by due date of return. See ¶ 2.1.08 (G).  Contribution of a “qualified reservist distribution.” See ¶ 2.6.06 (C).