Comingled After and Pre Tax in Retirement Accts in 1980s

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Mike83
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Comingled After and Pre Tax in Retirement Accts in 1980s

Post by Mike83 »

About 40 year ago, as a younger investor, I put money into my employers 401k on an after-tax basis in addition to the typical pre-tax basis. Roth's had not been invented at that time.

When I rolled these funds into the plan at my next employer (1988), these funds became co-mingled and the tax status was no longer tracked, namely everything was treated as pre-tax.

At the time, I had about $12,000 in after-tax, and $27,000 in pre-tax. Fast forward to the present, five rollovers later, and ready to start RMDs, I'm in the seven figure range, all except that original $12,000 and its returns being pre-tax.

I don't think there is any way to reasonably fix this. The amount is relatively small and I'm OK now with that portion of the investment being taxed on the way in and on the way out, as my personal penalty for not being aware or alert.

Any suggestions? Let it ride or try to sort it out for the sake of compliance?
Last edited by Mike83 on Mon Dec 06, 2021 9:30 pm, edited 1 time in total.
Makefile
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Re: Comingled After and Pre Tax in Trad IRA in 1980s

Post by Makefile »

Do you still have documents from back then to substantiate the 12,000 in after tax contributions? And is the entire balance going to be rolled over to an IRA before you start withdrawing?

So long as you've never withdrawn or converted a traditional IRA before, never withdrawn or converted from a 401(k) before, and have all 401(k) you've ever had together in one IRA, you could file an 8606 claiming the basis at the time you take your first distribution. There would be no ambiguity over whether the after-tax amount is still in a 401(k) or in the IRA if you no longer have a 401(k).

In fact, consider an alternate situation where instead of continuing to roll from plan to plan, you had maintained a rollover IRA this whole time, rolling each employer plan into it as you left each company. I believe you would be in the exact same situation as you will be now if you roll the entire balance to an IRA, as the after tax/pre tax distinction would also be lost when rolling to an IRA (and it would be up to you to track).
123
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Re: Comingled After and Pre Tax in Trad IRA in 1980s

Post by 123 »

I have a very similar situation so I'm interested. In my case I have the historic federal and state tax returns so I've can figure out the numbers. But California had different IRA limits than federal some years so the federal and state basis are different. When RMD time comes for me I'll have a federal basis of less than $25K on an account of $1+ million.

I'm not worried about doing the 8606 stuff myself. It just that after I'm gone my surviving spouse would likely see an 8606 requirement as an obstacle to her doing her own simple tax returns. Her cost of a tax preparer would easily exceed the tax benefit of doing the calculation.

So I'm somewhat tempted to forget that I have any basis. I've got some years to think it over.
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shess
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Re: Comingled After and Pre Tax in Trad IRA in 1980s

Post by shess »

I think you should consult a tax professional. The problem is that form 8606 applies to after-tax IRA contributions. To the best of my knowledge for after-tax 401k contributions, the 401k should track it for you. On rollover, I would expect either the information would be transfered, or, more likely, the target 401k would not accept the rollover of after-tax money, in which case you may have lost the basis.

For comparison, you can rollover a traditional IRA into many 401k plans these days, and a traditional IRA can contain after-tax contributions. In making such a rollover, the 401k plan will ask you to verify that there are NO after-tax dollars in the rollover, and they'll sometimes ask multiple times, and there will likely be somewhat scary language involved. The reason is because once you have done that rollover, if you rolled over any after-tax basis into the 401k, you CANNOT reclaim that basis.

I don't recall how after-tax contributions to 401k were handled when doing a rollover to a traditional IRA. Since that capability predates Roth IRA provisions, if you moved your 401k to a "rollover IRA" in, say, 1990, then the after-tax stuff was there, and you just need to figure out how to remedy the missing 8606 forms since then. But if you later consolidated that "rollover IRA" into a 401k, the above paragraph kicks in, you can't rollover after-tax funds from a tIRA into a 401k.

Note that your subject line says "IRA" and your body text says "401k". These are covered by different rules. The rules are often similar, but not always.

In my experience, decent tax professionals will tell you "You've got nothing" and not charge you if you obviously have nothing. So a concise explanation with evidence of the after-tax contributions plus the rollovers is probably your first job (if they have to spend time helping you track things down, they're probably less likely to give you a free "No").
Makefile
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Re: Comingled After and Pre Tax in Trad IRA in 1980s

Post by Makefile »

shess wrote: Mon Dec 06, 2021 12:52 am I don't recall how after-tax contributions to 401k were handled when doing a rollover to a traditional IRA. Since that capability predates Roth IRA provisions, if you moved your 401k to a "rollover IRA" in, say, 1990, then the after-tax stuff was there, and you just need to figure out how to remedy the missing 8606 forms since then. But if you later consolidated that "rollover IRA" into a 401k, the above paragraph kicks in, you can't rollover after-tax funds from a tIRA into a 401k.
So long as the OP has never made a nondeductible contribution to an IRA (cf., a 401k), and has never made a traditional IRA withdrawal or Roth conversion, I'm not sure the OP has ever incurred an obligation to file an 8606 yet. Merely having an IRA basis doesn't mean you have to file the form every year, nor would a 401(k) rollover to an IRA (even one containing after-tax contributions) cause it that I can see.

The OP will have to elaborate on whether any of these funds have ever been in an IRA, or if every rollover was directly from one 401(k) to another.
Makefile
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Re: Comingled After and Pre Tax in Trad IRA in 1980s

Post by Makefile »

shess wrote: Mon Dec 06, 2021 12:52 am I think you should consult a tax professional. The problem is that form 8606 applies to after-tax IRA contributions. To the best of my knowledge for after-tax 401k contributions, the 401k should track it for you. On rollover, I would expect either the information would be transfered, or, more likely, the target 401k would not accept the rollover of after-tax money, in which case you may have lost the basis.

For comparison, you can rollover a traditional IRA into many 401k plans these days, and a traditional IRA can contain after-tax contributions. In making such a rollover, the 401k plan will ask you to verify that there are NO after-tax dollars in the rollover, and they'll sometimes ask multiple times, and there will likely be somewhat scary language involved. The reason is because once you have done that rollover, if you rolled over any after-tax basis into the 401k, you CANNOT reclaim that basis.

I don't recall how after-tax contributions to 401k were handled when doing a rollover to a traditional IRA. Since that capability predates Roth IRA provisions, if you moved your 401k to a "rollover IRA" in, say, 1990, then the after-tax stuff was there, and you just need to figure out how to remedy the missing 8606 forms since then. But if you later consolidated that "rollover IRA" into a 401k, the above paragraph kicks in, you can't rollover after-tax funds from a tIRA into a 401k.

Note that your subject line says "IRA" and your body text says "401k". These are covered by different rules. The rules are often similar, but not always.

In my experience, decent tax professionals will tell you "You've got nothing" and not charge you if you obviously have nothing. So a concise explanation with evidence of the after-tax contributions plus the rollovers is probably your first job (if they have to spend time helping you track things down, they're probably less likely to give you a free "No").
I looked a little more into this and it appears that after-tax 401(k) contributions could not be rolled over anywhere--to an IRA or even another 401(k)--before 2002. Interesting!
See p. 24 of the 2001 publication 575 - https://www.irs.gov/pub/irs-prior/p575--2001.pdf
Compare to p. 24 of the 2002 publication 575 - https://www.irs.gov/pub/irs-prior/p575--2002.pdf
So the question is where did the 12,000 go? Presumably it was refunded to the OP? Or if it was erroneously rolloed over, the plan just lost track of the fact it was an after tax contribution.
It looks like there were also special rules for after tax 401(k) contributions made before 1987 (as form 8606, and the pro rata rule, did not exist until then).
shess
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Re: Comingled After and Pre Tax in Trad IRA in 1980s

Post by shess »

Makefile wrote: Mon Dec 06, 2021 1:26 am
shess wrote: Mon Dec 06, 2021 12:52 am I think you should consult a tax professional. The problem is that form 8606 applies to after-tax IRA contributions. To the best of my knowledge for after-tax 401k contributions, the 401k should track it for you. On rollover, I would expect either the information would be transfered, or, more likely, the target 401k would not accept the rollover of after-tax money, in which case you may have lost the basis.

For comparison, you can rollover a traditional IRA into many 401k plans these days, and a traditional IRA can contain after-tax contributions. In making such a rollover, the 401k plan will ask you to verify that there are NO after-tax dollars in the rollover, and they'll sometimes ask multiple times, and there will likely be somewhat scary language involved. The reason is because once you have done that rollover, if you rolled over any after-tax basis into the 401k, you CANNOT reclaim that basis.

I don't recall how after-tax contributions to 401k were handled when doing a rollover to a traditional IRA. Since that capability predates Roth IRA provisions, if you moved your 401k to a "rollover IRA" in, say, 1990, then the after-tax stuff was there, and you just need to figure out how to remedy the missing 8606 forms since then. But if you later consolidated that "rollover IRA" into a 401k, the above paragraph kicks in, you can't rollover after-tax funds from a tIRA into a 401k.

Note that your subject line says "IRA" and your body text says "401k". These are covered by different rules. The rules are often similar, but not always.

In my experience, decent tax professionals will tell you "You've got nothing" and not charge you if you obviously have nothing. So a concise explanation with evidence of the after-tax contributions plus the rollovers is probably your first job (if they have to spend time helping you track things down, they're probably less likely to give you a free "No").
I looked a little more into this and it appears that after-tax 401(k) contributions could not be rolled over anywhere--to an IRA or even another 401(k)--before 2002. Interesting!
See p. 24 of the 2001 publication 575 - https://www.irs.gov/pub/irs-prior/p575--2001.pdf
Compare to p. 24 of the 2002 publication 575 - https://www.irs.gov/pub/irs-prior/p575--2002.pdf
So the question is where did the 12,000 go? Presumably it was refunded to the OP? Or if it was erroneously rolloed over, the plan just lost track of the fact it was an after tax contribution.
It looks like there were also special rules for after tax 401(k) contributions made before 1987 (as form 8606, and the pro rata rule, did not exist until then).
This seems odd, because it would imply that the only way to get those after-tax funds out without penalty would be to leave them in the fund until you retire. But that leaves open issues like leaving a company when your balance is smaller than the amount where they can push you out of the plan, or the issue of a plan which is terminated. And surely other issues.

I'm starting to wonder about whether it would work to just roll everything into a tIRA, and then start filing form 8606. I'd want to have documentation for the original after-tax contributions and also that the rollovers carried forward the entire balance each time.

Hmm, and as many 1099-R forms as possible. I mean, that's maybe the first thing to check, maybe the expected amount is in box 2a of your last rollover's 1099-R, in which case everything is peachy. Even if it's not, if it was on earlier ones, that's good evidence to have.
Sprucebark
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Re: Comingled After and Pre Tax in Trad IRA in 1980s

Post by Sprucebark »

I’d probably just let sleeping dogs lie at this point.
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Harry Livermore
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Re: Comingled After and Pre Tax in Trad IRA in 1980s

Post by Harry Livermore »

Sprucebark wrote: Mon Dec 06, 2021 3:37 am I’d probably just let sleeping dogs lie at this point.
Meaning pay tax upon the distribution of the $12K, after paying taxes on it once already?
Just curious.
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retiredjg
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Re: Comingled After and Pre Tax in Trad IRA in 1980s

Post by retiredjg »

I think the only person who might actually know the answer is Alan S. You might contact him by pm if he does not see this thread.

My guess is that there is nothing that can be done at this point and that this is too small of an amount to spend any time worrying about.

I think (again a guess) the mistake happened in the first rollover in 1988 when the tax status tracking stopped. Even if it can be fixed, it seems like that would be time consuming and frustrating, especially if it triggered a query from the IRS.
niagara_guy
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Re: Comingled After and Pre Tax in Trad IRA in 1980s

Post by niagara_guy »

I had a similar issue. I prepared all the old 8606 form for both me and spouse and added a cover letter on my tax return about 6 years ago. (We had several years of after-tax contributions to t-IRA for each of us.) never heard back from IRS, have filed form 8606 every year since with no issues (8606 must be done for an individual). I knew I had not made deductible contributions and knew what years we had contributed the after tax dollars for but did not have any more documents than that.

Enter 8606 in the upper left corner search box to find more threads.
aristotelian
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Re: Comingled After and Pre Tax in Trad IRA in 1980s

Post by aristotelian »

Makefile wrote: Mon Dec 06, 2021 12:03 am Do you still have documents from back then to substantiate the 12,000 in after tax contributions? And is the entire balance going to be rolled over to an IRA before you start withdrawing?
The contributions should show on 5498's issued by the custodian. If they are too old to get from the custodian, the IRS now allows online requests for transcripts that should show the 5498 info. I haven't tried it but worth a shot: https://www.irs.gov/individuals/get-transcript
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retiredjg
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Re: Comingled After and Pre Tax in Trad IRA in 1980s

Post by retiredjg »

Mike83, the title of your thread talks about "traditional IRA" but your post says the money went into 401k instead. This is causing you to get some answers that apply to IRA, not 401k.

You can edit the title by using the edit button (little pencil) on your original post.
dbr
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Re: Comingled After and Pre Tax in Trad IRA in 1980s

Post by dbr »

I also have pre 1987 post tax contributions in my 401k. I recently managed to withdraw those at correct tax handling because the 401k records are correct.

It sounds like getting the 5498 and trying to revise whatever your current plan reports on the 1099 could work. Now that they have lost the status you will have to do this for every withdrawal you make, it would seem.
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retiredjg
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Re: Comingled After and Pre Tax in Trad IRA in 1980s

Post by retiredjg »

As I understand it, pre-1987 after-tax contributions can be removed from a 401k alone (meaning without their associated earnings). However, this requires that records exist that verify the after-tax balance.

It seems the records either don't exist or don't exist with the current 401k custodian.

I suppose one could take a distribution for the after-tax amount and report it as after-tax on the tax return. The IRS would send a query since there would be a contradiction with the 1099. And one could try to make the case for after-tax. However, how would one prove the after-tax money was not distributed to the owner back in 1988 when the rollover occurred?

I'm not sure what form 5498 would have to do with any of this because that form does not apply to a 401k to my knowledge.
RetiredCSProf
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Re: Comingled After and Pre Tax in Trad IRA in 1980s

Post by RetiredCSProf »

123 wrote: Mon Dec 06, 2021 12:12 am I have a very similar situation so I'm interested. In my case I have the historic federal and state tax returns so I've can figure out the numbers. But California had different IRA limits than federal some years so the federal and state basis are different. When RMD time comes for me I'll have a federal basis of less than $25K on an account of $1+ million.

I'm not worried about doing the 8606 stuff myself. It just that after I'm gone my surviving spouse would likely see an 8606 requirement as an obstacle to her doing her own simple tax returns. Her cost of a tax preparer would easily exceed the tax benefit of doing the calculation.

So I'm somewhat tempted to forget that I have any basis. I've got some years to think it over.
+1 -- After retiring, I converted my 403b accounts to rollover IRAs. I also had IRAs to which I had contributed, one with post-tax money, the others were pre-tax federal, but post-tax California state. My first withdrawals from my tax-deferred IRAs were Roth conversions, prior to starting RMDs. I resolved the difference between the California and Federal IRA contribution rules in my first year of conversions and did not need to address it again. Luckily, I had all my paperwork organized (tax returns and investment statements going back over 30 years) and was able to save a lot on state taxes that year. Going forward, I continue to have a basis on withdrawals each year from my rollover IRAs. TurboTax generates the 8606 for me. The savings is small, but not much effort to enter the updated information each year.
Katietsu
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Re: Comingled After and Pre Tax in Trad IRA in 1980s

Post by Katietsu »

Mike83 wrote: Sun Dec 05, 2021 11:47 pm
At the time, I had about $12,000 in after-tax, and $27,000 in pre-tax. Fast forward to the present, five rollovers later, and ready to start RMDs, I'm in the seven figure range, all except that original $12,000 and its returns being pre-tax.
The earnings on the $12,000 would be pre tax. So the maximum after tax would be just the contributions. Also, Post 86 and Pre 87 after tax contributions are different and should have been tracked differently.

Are you sure your after tax contributions were all rolled into the next 401k. I think I have a vague memory of after tax contributions being returned when one left their job (maybe just the pre 1987?) in the eighties.

I second that Alan is probably the only one who can address this without hesitation.
Alan S.
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Re: Comingled After and Pre Tax in Trad IRA in 1980s

Post by Alan S. »

Mike83 wrote: Sun Dec 05, 2021 11:47 pm About 40 year ago, as a younger investor, I put money into my employers 401k on an after-tax basis in addition to the typical pre-tax basis. Roth's had not been invented at that time.

When I rolled these funds into the plan at my next employer (1988), these funds became co-mingled and the tax status was no longer tracked, namely everything was treated as pre-tax.

At the time, I had about $12,000 in after-tax, and $27,000 in pre-tax. Fast forward to the present, five rollovers later, and ready to start RMDs, I'm in the seven figure range, all except that original $12,000 and its returns being pre-tax.

I don't think there is any way to reasonably fix this. The amount is relatively small and I'm OK now with that portion of the investment being taxed on the way in and on the way out, as my personal penalty for not being aware or alert.

Any suggestions? Let it ride or try to sort it out for the sake of compliance?
I think that this issue was actually resolved years ago. Prior to 2002 (EGTRRA), after tax contributions in employer plans could not be rolled anywhere. This changed in 2002 per this portability change in EGTRRA:
A distribution of amounts attributable to an employee’s after-tax contributions to a qualified plan or 403(b) plan can now be directly rolled over to another plan. (After-tax contributions to a 457(b) plan cannot be rolled over, but such contributions are extremely rare in any event.) A rollover is not necessary to avoid immediate taxes on the portion of the distribution equal to the after-tax contributions, since a distribution of after-tax contributions is not taxable. However, rolling over the after-tax contributions will allow for continued tax deferral on any earnings on the contributions.
Therefore, when you did the lump sum rollover in 1988, your after tax balance was almost certainly distributed to you tax free, and reported on a 1099R with no taxable amount in Box 2a. That was standard procedure with 401k distributions and rollovers. After 33 years, it would be easy to forget that.

My guess, then is that you did recover any after tax contributions tax free. Of course, if you still have your 1988 1099R forms, you might try to dig them out.
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Mike83
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Re: Comingled After and Pre Tax in Trad IRA in 1980s

Post by Mike83 »

Thank you everyone. The outpouring of expertise is remarkable.

My current Trad IRA is an agglomeration of many employer accounts (sequentially rolled to the next employer) as well as very early individual Bank IRAs rolled in sideway along the way.

Looking at the 1988 transfer records, the funds were transferred and commingled on the first corp to corp 401k rollover. I'm not even sure the phrase 401k was used in the early 80s, as my plan is labeled 'SIP' pre and post tax, but it was definitely rolled into a 401k.

I'm going to run the general question by my CPA, and I really appreciate the information provided here.
VanGar+Goyle
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Re: Comingled After and Pre Tax in Retirement Accts in 1980s

Post by VanGar+Goyle »

The instructions for form 8606 mention a Penalty for Not Filing:
If you are required to file Form 8606 to report a nondeductible contribution to a traditional IRA for 2020, but don’t do so, you must pay a $50 penalty, unless you can show reasonable cause.

In a worst case, you are penalized $2000 and spend many hours cleaning it up. At some point, a professional EA or CPA may be useful.
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retiredjg
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Re: Comingled After and Pre Tax in Retirement Accts in 1980s

Post by retiredjg »

Apparently, the IRS does not actually charge people for this. They can, but don't. So don't voluntarily send in a check. They will bill you if they want the money. (And so far, I don't think anybody has reported being billed.)
Alan S.
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Re: Comingled After and Pre Tax in Trad IRA in 1980s

Post by Alan S. »

Mike83 wrote: Mon Dec 06, 2021 9:27 pm Thank you everyone. The outpouring of expertise is remarkable.

My current Trad IRA is an agglomeration of many employer accounts (sequentially rolled to the next employer) as well as very early individual Bank IRAs rolled in sideway along the way.

Looking at the 1988 transfer records, the funds were transferred and commingled on the first corp to corp 401k rollover. I'm not even sure the phrase 401k was used in the early 80s, as my plan is labeled 'SIP' pre and post tax, but it was definitely rolled into a 401k.

I'm going to run the general question by my CPA, and I really appreciate the information provided here.
Such a transfer was not permitted until 2002. The following is a copy of EGTRRA (aka Bush tax cuts) Sec 643(a) effective in 2002. This SEC outlines changes to the tax code effective at that time:
SEC. 643. ROLLOVERS OF AFTER-TAX CONTRIBUTIONS.

(a) Rollovers From Exempt Trusts.--Paragraph (2) of section 402(c)
(relating to maximum amount which may be rolled over) is amended by
adding at the end the following: ``The preceding sentence shall not
apply to such distribution to the extent--
``(A) such portion is transferred in a direct
trustee-to-trustee transfer to a qualified trust which
is part of a plan which is a defined contribution plan
and which agrees to separately account for amounts so
transferred, including separately accounting for the
portion of such distribution which is includible in
gross income and the portion of such distribution which
is not so includible, or
``(B) such portion is transferred to an eligible
retirement plan described in clause (i) or (ii) of
paragraph (8)(B).''.
For the after tax contributions in the old 401k, the first rollover would have had to wait until 2002 to move the after tax amounts to another plan. So there is an unexplained discrepancy here.
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