Retirement Savings Plan
I have a retired client that still has a tax-deferred savings plan at his previous employer, Chrysler Corp. Roughly 30% of the funds are considered non-taxable since they were made with after-tax contributions. Can 100% of this account be transferred to an existing IRA? Also, when receiving his RMD, how is the taxable portion of each payment determined?
Thanks,
Larry Moran, MBA, CLU.
Permalink Submitted by Alan Spross on Thu, 2010-02-04 16:39
The RMD must be withheld from any IRA rollover and distributed to client before year end.
There would be two 1099R forms, one for the RMD and the other for the direct rollover. The RMD 1099R should show a pro rated taxable amount based on the percentage of after tax contributions in the plan. The direct rollover 1099R will show -0- as taxable but will show the after tax amount in Box 5. This form should be saved because the client needs to complete Form 8606 for his IRA reporting the addition of after tax contributions from the rollover and this will enable future IRA distributions to be pro rated between taxable and non taxable amounts with an 8606 needed each year.
Plan administrators may tend to cut him a separate check for the after tax amount since many people do not want this rolled into their IRA, so he should be very clear if he wants it to be part of the rollover. But if he gets a check he can roll it over himself.
A current issue for many is how to get these after tax amounts converted to a Roth IRA while at the same time transferring the pre tax amount to a traditional IRA. The IRS has not been clear about whether this can be done using direct rollovers and there are dozens of posts on this site discussing this issue. Client may wish to wait for a short time to see if the IRS clarifies this further because he will be further ahead if he can get these after tax amounts into a Roth IRA which will generate tax free earnings and will not have RMDs.
Also, if the client happens to have pre 1987 after tax amounts in the plan, he may be able to get them distributed separately without pro rating and roll them over tax free to a Roth IRA. But he should do this AFTER the RMD is issued or these after tax amounts will be deemed to be his RMD. The first distribution each year is always deemed to include the RMD amount. But if he can get all the after tax amounts into a Roth IRA, it will avoid all future pro rating of his TIRA RMDs unless he has prior non deductible TIRA contributions.
As you can see there are multiple issues here, including pre 87 after tax contributions, RMDs, Roth conversions under 2010 rules etc. At least there is probably no highly appreciated employer stock to consider, being Chrysler Corp. Another issue is whether a Roth conversion of any of the pre tax money is advisable in his circumstances or not. The entire plan could be converted directly, and the pre tax portion would be split between 2011 and 2012. That would avoid the questions of how to get JUST the after tax money into the Roth, but it may not be advisable for him.