Even if the moneys are in separate IRA accounts, the IRA aggregation rule forces you to consider all contributions as if they’re in one account, Baumhover said.
The catch, Baumhover said, is that it doesn’t apply to monies inside an employer-sponsored plan. For instance, the way to avoid the hit on the $100,000 mentioned earlier is to move the $200,000 from the IRA into an employer-sponsored account.
“The solution was that we identified that she participated in [a qualified] employer-sponsored plan,” Baumhover said. It happened to be the Thrift Savings Plan. This “allows for rollovers out of IRAs into the plan itself,” he said. This TSP was available to her because she used to have a government job and she’d kept the TSP account open.
The firm had to make sure this was feasible with the CPA—since he had the actual records and dollar amounts of contributions. It took about three or four months to go over the plan with him and make sure he was on board with it, said Baumhover, and then to back up and find out when the doctor’s contributions became nondeductible money.
“We moved the pretax money out of the IRA and into the Thrift Savings Plan, and what was left behind was all the money that she had been contributing under the premise of nondeductible contributions that her CPA had been tracking over the years,” said Baumhover.
At that point, with the pretax money held under an employer plan, that became the tax-free part of her plan. “We were the folks that helped navigate through that and process the paperwork to get the money in the right place. Any number of those steps, if she had tried it herself, or if she had miscalculated something, then there could have been a taxable event.”
Hindsight being 20/20, he said, there are things a taxpayer could do differently to avoid the complexity of the situation, but the firm identified the potential pitfall she had run into.
Lawrence Financial has around 100 client households and approximately $100 million in assets under management.