RMD and after tax from employer plan
I’m leaving my company and required to take my RMD this year. Along with the pretax, I have 38k in after tax that I want to roll to a Roth IRA (I meet the MAGI test). I’m wondering if my plan has to cut me a check for 18k first out of the after tax for the RMD, then the remainder can roll to the roth ira.
Permalink Submitted by Alan Spross on Tue, 2008-11-11 23:14
You should find out if any of the post tax are pre 1987 dollars, since they can come out first. In that case, there might be enough to pay out the RMD tax free rather than having a pro ration of pre tax and post tax dollars. The RMD needs to be taken first, regardless of the tax situation.
The rule regarding what is left is that in a partial rollover, the pre tax amount is considered the first dollars rolled over. So if the plan will issue two direct rollovers, you could do the TIRA rollover first leaving only the after tax dollars (those left after the RMD) in the plan. Finally, they could be converted to a Roth IRA directly and tax free. This is the most tax efficient way to get dollars into the Roth IRA.
If the plan will not offer the two direct rollovers (they are only required to offer one), use it for the TIRA transfer of pre tax amounts, then have them issue you a check for the after tax amount. You can then roll that over yourself to a Roth IRA. This would not be a conversion of TIRA money and would not require Form 8606.
Note that the IRS has not fully released Regs yet on the direct Roth conversions from qualified plans. Therefore, the above solution is subject to prospective IRS releases.
Permalink Submitted by donna messinger on Thu, 2008-11-13 02:59
pre-87 or post 86 monies don’t matter when you are doing a complete rollover from your terminated plan. They are combined and tax free.
then my questions would be. If I have the employer roll the pre tax to the TIRA and send me a check for the full 38,000 after tax, one would assume that the after tax distribution fulfilled the RMD requirement.
You stated then do a rollover to the Roth with the after tax money. Can I roll the whole amount over that I received, even though, technically 18k of it was my RMD?
Permalink Submitted by Alan Spross on Thu, 2008-11-13 06:26
You could ask the plan to do a simultaneous distribution whereby the pre tax amount would be a direct rollover to a TIRA and the 38,000 paid directly to you. Ask that the plan consider the 38,000 basis that they are holding out of the rollover to include the RMD, which the plan is required to withhold from the rollover. They would then send you the check for 38,000.
You must then retain the RMD amount which will be tax free and it is NOT eligible for rollover. But the excess $20,000 can be rolled over to a Roth IRA. I would ask the plan to confirm that they will issue two 1099R forms, one reflecting the direct rollover and the other showing a tax free distribution of 38,000.
The attached link shows that you are entitled to roll over the 20,000 to a Roth IRA directly without going through a TIRA. As stated, there are no complete Regs on all of this yet, but this Notice should help. Refer to Q&A #1 of Sec 824:
http://www.irs.gov/pub/irs-drop/n-08-30.pdf