Life and Death Planning for Retirement Benefits

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Chapter 2: Income Tax Issues 115
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 or
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 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 t will thereby also
acquire all (or part) of the ex-spouse’s basis. For a beneficiary’s basis in an inherited IRA, see
For how the after-tax money (basis) comes OUT of the IRA, see
 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 added by § 1102 of TRA ’86.
 Excess IRA contributions not returned by due date of return. See G).
 Contribution of a “qualified reservist distribution.” See C).
 Rollover of after-tax money from a QRP after 2001. and
permit nontaxable as well as taxable amounts to be rolled over from a
QRP to a traditional IRA after 2001; see 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 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 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, 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