QRP PRO RATA
Alan you may recall we had much discussion and debate as to whether taxable funds in a QRP were subject to pro rata rule. Natalie and other experts seemed to disagree and no one seemed to be 100% sure due to ambiguous wording in IRS rules etc.. I was reading your post on another question and you said this..
The IRS recently ruled in Notice 2009-75 that a direct Roth conversion from a QRP would be taxable in the same manner as if it had been distributed to the employee.
Is this the clarification we had been waiting for? Are distribution from qrp’s jsut like IRSs? Cream in the coffee pro rata.. end of story? Does this apply to all distributions and not only for Roth conversions?
Chuck
Permalink Submitted by Alan Spross on Sat, 2009-10-24 18:10
Chuck,
The ruling does not go far enough to fully clarify this issue, so we are still somewhat in the dark. The IRS seems to think that QRP funds are all destined to be transferred to either a TIRA or a Roth IRA, but they never seem to address a tandem distribution with the intent to direct only the after tax amounts to the Roth.
Hopefully, we will get something definitive and soon because QRP administrators will have to know how much to show as taxable on their direct Roth conversion 1099R forms. The IRS depends on these plans to identify the proper amounts because there are no 8606 forms used to either report after tax basis or to report conversions if done directly.
As stated earlier, pre 1987 after tax contributions to a QRP are an exception because they can come out separately from other distributed amounts, ie could be directly converted to a Roth IRA tax free.
Doing an indirect rollover is another way to get this done, but you have to have the cash to replace the 20% mandatory withholding on the pre tax amount. You would order a lump sum distribution, indirectly roll the pre tax amount to a TIRA first replacing withheld funds if necessary , and finally rolling the after tax amount to a Roth IRA. This is possible because funds distributed to the participant and rolled over by the participant are deemed first to come from pre tax amounts. This is clearly in Sec 402 of the tax code per JCWAA legislation passed in 2002.
Unfortuneately, a number of opinions exist about trying to do this by direct rollovers, but the IRS has not been clear on the pro rate rules when direct rollovers to two different IRA types is involved.
There was also a PLR issued a few months ago that was referenced in a WSJ article that itself was inconclusive.
Link to Article: http://online.wsj.com/article/SB125573502903090977.html?mod=WSJ_hpp_sect…
Link to PLR: http://www.irs.gov/pub/irs-wd/0909074.pdf
Permalink Submitted by charles lore on Tue, 2009-10-27 01:04
Thanks Alan… I guess we’ll just have to keep waiting on the edge of our seats for the final clarification.
Permalink Submitted by Alan Spross on Tue, 2009-10-27 02:35
I really wonder if the IRS has just overlooked this issue, or if there are conflicts that they are in process of resolving. The two official IRS Notices are very conspicuous in ignoring the prospect of these tandem rollovers,particularly when the most recent release discusses QRPs with after tax basis.