Plans included when calculating withdrawal /conversion TAXES
Calculating Roth conversion taxes due (or any taxes due from withdrawals)–
If the individual is still working with an active 401k but also does side work and has his/her own active SEP (or solo 410k) where additional contributions are being made plus an IRA (with non deductible contributions) and even a 401k left over from a previous job (with pre and post tax contributions), which items are included in the calculation for taxes due at conversion or any withdrawal?
My understanding is that the active 401k is the only item left out of the calculation but the other holdings (IRA, active SEP, inactive 401k) WOULD be included to determine the percentage of taxation for each dollar converted.
Under what circumstances are other holdings left out of the calculation? Would an active Solo 401k plan also be fully included?
Permalink Submitted by Alan Spross on Thu, 2009-10-29 20:22
In figuring the taxable amounts of distributions or conversion, each plan uses only it’s OWN amount of basis. The exception is IRA accounts of all types. All owned traditional IRA, SEP IRA or SIMPLE IRAs balances are added together for application of basis.
IRAs are never added in with other types of retirement plans such as 401k, 403b, solo K, or 457 regardless of activity status.
Permalink Submitted by [email protected] on Thu, 2009-10-29 21:04
So Someone who has an inactive 401k of a firm they left wont use the value of the taxable/non taxable portion for the conversion calculation. But when they hit 70-1/2 they will have to withdraw funds from incative 401k but not from the 401k where they’re working and contributing (unless 5% owner). Is that correct?
If you decide to convert the “left behind” inactive 401k to a Roth IRA, you will only calculate the taxation on this standalone item not any other holding? Each NON IRA item you listed would have it’s own tax calculation, not aggregated with anything else?
Permalink Submitted by Alan Spross on Thu, 2009-10-29 21:25
Yes. While each 401k plan may well have no basis, if it does have basis there is no combination with any other plans of any type. A direct conversion, done without first creating a traditional IRA balance, will be tax free to the extent of any basis in the particular plan. The plan administrator is responsible for reporting the taxable amounts on Form 1099R. The taxpayer only needs to retain their own records for IRA balances.
You are also correct about the RMDs. For active qualified plans, they do not begin until after separation from service in most cases, although a plan is authorized to require RMDs at 70.5 for non 5% owners if they wish. For 5% owners, age 70.5 always triggers RMD requirements. Taxation of these RMDs is the same as for additional distributions, ie. pro rated based on the amount of basis in each plan. There is an exception for pre 1987 after tax contributions, where the exception applies to the pro rate rules, not to the RMD requirement. There is yet another exception to RMD requirements for 403b plans that track pre 1987 accruals. That exception allows RMDs for the pre 87 accruals to be delayed until age 75.