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Bill, Enrolled Agent
Category: Tax
Satisfied Customers: 3153
Experience:  EA, CEBS - 35 years experience providing financial advice
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I had a 401k with after tax money inside which was rolled to

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I had a 401k with after tax money inside which was rolled to an IRA all during 2007. Now I would like to remove the taxed portion in the form of stocks purchased in the IRA account. The reason being I would only have to pay capital gains (losses) on these stocks when sold if I did so, whereas I would have to pay ordinary income if I cash them out through the IRA. I have 1099R and letters showing the dollar amount of the taxed funds originally contributed. Are there tax consequenses? I am over 60 years old.

Under the IRS reporting requirements it is not possible to remove only the previously taxed portion of funds from an IRA. Each distribution is considered a prorata portion of taxed and untaxed monies. The calculation is done on Form 8606. The previously taxed portion (representing your after-tax rollover and any nondeductible IRA contributions you may have made) represents your IRA basis (line 2 on Form 8606). For example, if your IRA basis is $20,000 and the total value of all of your IRA accounts is $200,000 then only 10% ($20,000/$200,000) of your distribution would be tax-free.

The value of the stock on the date of the distribution would become your cost basis for determining your gain or loss when the stock is eventually sold.



Customer: replied 8 years ago.

So as I understand it even if I only pull out the after tax portion I would still have to pay ordinary income tax based on the ratio of aftertax contribution to the total of all IRA accounts.


I.e 20% aftertax portion of all IRA accounts. Any distributions would be 20% tax free 80% taxed as ordinary income. I cannot pull just the after tax money out.


Also, long term capital gains would not apply until 1 year after the transaction - even though I have held the stocks n the IRA over 1 year.


Does this also apply to a Roth rollover? Can I then transfer the entire IRA over to a Roth with 20% untaxed and the remainder taxed?


Am I correct?

Yes, that is correct that if you pull out an amount equal to after-tax portion only then you will be subject to income taxes (on the untaxed portion) based on the ratio calculated on Form 8606. The portion that is tax-free changes each year based on the amount of the basis that has already been recovered in prior years and the change in the value of the IRA account(s). Your holding period for the stock that is distributed begins on the day it is distributed from the account.

You could do a coversion of the entire IRA (including any other traditional IRAs that you may have) to a Roth IRA and you would only pay taxes on the portion that has not been taxed. To be eligible to convert your modified adjusted gross income must be less than $100,000.

Customer: replied 8 years ago.
If you file jointly is the adjusted gross income still $100,000 or does it go up to $150,000? Note that the IRA is in my name.

It is still $100,000 for married filing jointly. However, in 2010 there is no limit for conversions so the $100,000 restriction will no longer apply.

Customer: replied 8 years ago.
The withdrawal/transfer from the IRA is not added to the $100,000 income limit - correct?
Yes, that is correct. The conversion amount is not added for purposes of determining eligibility to convert. Many investors are considering converting this month due to the drop in value of their accounts.
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