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.
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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.
