Rollover to Roth Notice 2009-75
It still seems unclear whether a partial distribution (or lump sum) from a QP which includes post 1986 after tax contributions are subject to the pro ration rules. I realize there’s no issue if rolling all contributions to Roth or Trad. However, can the after tax contributions be allocated directly to the Roth and the pre tax to the Trad (whether partial or lump sum distribution) without concern for the pro ration rules and not using an indirect rollover?
Permalink Submitted by Alan Spross on Thu, 2009-09-17 02:41
I agree it could have made the issue clearer by including an example of direct rollovers done to both TIRA and Roth IRA account.
However, it is clear (p. 7 of the Notice) that the part that goes to the Roth IRA is included in income in the same manner as if it had gone to a TIRA first, the taxpayer’s only TIRA, and was then converted to a Roth IRA. In that case the pro rate rules would apply all the way through, first for the amounts distributed from the QRP and then for the amounts converted per Form 8606.
Apparenlty, this leaves the indirect rollover route as the only way to exclusively direct the pre tax amounts to the TIRA and the after tax amounts to the Roth IRA. Since 2002, Sec 402 specifies that rollover done by the participant, ie indirect rollovers are deemed to come first from pre tax amounts. That leaves the assumption that this rule does not apply to direct rollovers that the participant does not receive. That leaves the direct rollovers to be subject to pro rate rules for post 86 after tax amounts.
There is another unstated area here, since all these IRS Regs refer to “payments”. It is never stated, but “payments” cannot apply separately to each individual distribution, but collectively to all distributions made in a calendar year. If the entire plan is distributed over multiple distributions during a year, the 1099R still specifies a lump sum distribution in the box. And the after tax amounts vrs pre tax amounts in the plan change on different dates, so the only workable way to determine the amounts is on the single 1099R reflecting all the distribution activity for the year. Do all plans handle this in the same manner? I rather doubt it, given the lack of clear Regulations.
Permalink Submitted by Andrea Cohen on Thu, 2009-09-17 06:20
Alan, thanks for your response and pointing me to 2009-75. Between that and your response in this posting, I understand. I just want to confirm whether the the rollover needs to be done via indirect transfer or instead by trustee-to-trustee transfer — when I traced back to 402(c)(2), I read it to indicate the rollover must be via trustee-to-trustee transfer in order to be deemed first to come from pre-tax money. Thanks once more for your help.
Permalink Submitted by Alan Spross on Thu, 2009-09-17 21:04
Hold it! You might be confusing the word “transfer” in 402(c)2 to mean a direct rollover or direct transfer. Here, the word simply means the movement of funds. Note that in 402(c)1 it refers to distributions to the participant. The participant then rolls the funds over (transfers them) as an indirect rollover to an IRA. It’s the distribution first to the participant that triggers the participant’s resulting rollover to be deemed pre tax dollars first.
If a direct rollover is done from the plan to the IRA, the pre tax and after tax funds come out pro rated, and the first dollars are not deemed to be pre tax.
You may have it right, and your last post might not be what you actually meant to say.
Permalink Submitted by Andrea Cohen on Mon, 2009-09-21 02:32
Thanks Alan. I did misunderstand — thanks for clarifying.