The Deductible Traditional IRA, Non-Deductible Traditional IRA and Roth IRA

In the article, 401k Rollovers, Where Should My Money Go?, we discussed various classifications of the 401k. We will continue the discussion to figure out how to allocate the money when working with rollovers and conversions.

When working with rollovers, the classifications become simplified: A) tax-deferred traditional 401k contributions, B) after-tax traditional 401k contributions and C) after-tax ROTH 401k contributions.

Here, tax-deferred traditional 401k contributions (A) includes the following: tax-deferred traditional personal contributions (elective deferral), traditional earnings and tax-deferred traditional employer contributions. After-tax ROTH 401k contributions (C) includes after-tax ROTH personal contributions (elective deferral) and ROTH earnings.

When rolling into personal IRA accounts, you will do the following. A) and B) will be placed into a traditional IRA. C) will be placed into a ROTH IRA. In the year, the rollover occurs, any after-tax traditional 401k contributions (B) can be tracked using IRS Form 8606, since this money will form the basis for your non-deductible traditional IRA contributions.

The article at www.investopedia.com, states: According to IRS Publication 590: "Form 8606 is not used for the year that you make a rollover from a qualified retirement plan to a traditional IRA and the rollover includes nontaxable amounts. In those situations, a Form 8606 is completed for the year you take a distribution from that IRA." However, it may still be a good idea to complete the form for your records.

Since after-tax traditional 401k contributions roll into non-deductible traditional IRA contributions, the IRS Form 8606 will help track these as a basis, to avoid combining this money with the earnings on this money, which is tax-deferred whether in the traditional 401k or traditional IRA.

To see an example of how this basis affects a conversion from a Traditional IRA to a ROTH IRA, read An Example of a 401k Rollover Followed By a ROTH Conversion.

Did this article help? We'd love to hear through your comments and questions.

This post was reposted from http://finlit.biz/retirement-2/the-deductible-traditional-ira-non-deductible-traditional-ira-and-roth-ira/, originally written on December 12th, 2013.