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Posted by Herb Smith on September 8, 2007, 12:26 am
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> I know I need to study IRS Pub 590, but I am hoping some
> kind soul will offer some educated insights ....
>
> As I recall, it is best to avoid comingling pre- and
> post-tax contributions in IRAs. I think it simplifies
> things when determining the tax on distributions. Is that
> right?
Possibly, but as long as you maintain accurate records and
file your 8606 form whenever you make a post-tax
(nondeductible) contribution, it should not be a problem.
> Or does the IRS require that you prorate the taxability of
> distributions across all IRAs, independent of the ratio of
> pre-tax and post-tax contributions in each IRA that funds
> were actually distributed from?
Correct
> Assuming that I am correct about perferring to keep pre- and
> post-tax contributions in separate IRAs, is there anything I
> can to correct the situation if I inadvertently comingled
> them?
>
> I am talking about effecting a correction, if possible,
> within a few days after I pushed the button to consolidate
> the separate IRAs.
>
> (I forgot why I was keeping them separate in the first
> place, and I decided to consolidate two IRAs that I have at
> one brokerage firm.)
>
> If I simply create a new IRA and fund it with the amount of
> the post-tax IRA before consolidation, would that be
> sufficient.
If you haven't read Pub 590 you may not be aware of a
fundamental truth about IRA accounts: No matter how many
individual accounts, brokers, etc that you use, the IRS
considers ALL these subaccounts to be part of a SINGLE IRA
account. Whether you physically separate your pre- and
post-tax contributions is irrelevant, each withdrawal is
effectively taxed as prorated amounts of each in all your
subaccounts. This is true regardless of which account you
tap for the withdrawal. As I stated above, form 8606 is the
route that you use to track the taxability of such
withdrawals.
> It is not clear to me how the IRS, decades later, know how
> much of an IRA was funded with pre-tax contributions and how
> much with post-tax contributions. But if it matters, the
> pre-tax IRA, which now includes some post-tax contribution
> and its earnings, was designated as a Rollover IRA when the
> account was opened.
>
> (I'm not sure that designation has stuck with the account
> since then. I need to check records.)
See above.
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