Pre 1987 Savings Plan
Client has a 540K Employee Savings Plan with the following breakdown –
Before tax deferrals = $24,000
Pre-1987 After Tax Savings = $140,000
Post 86 After Tax Savings – $157,000
Company Contributions = $217,000
What options does he have with each bucket of $ – Can he roll the Pre-87 money to a Roth IRA? If he then takes liquidations is it taxable?
Can he roll the post 86 money to a Roth? – what are his tax implications here as well when he wants withdrawals?
Permalink Submitted by Alan Spross on Thu, 2010-04-15 19:26
I suspect some of those figures include earnings, since the value is unlikely to be the same as the contribution amounts.
Pre 1987 after tax contributions (ex any earnings) can be distributed separately if the plan accounts separately for those contributions. Therefore, these amounts should be available for a tax free Roth conversion when distributed first.
The rest of the balance can be converted subject to the pro rate rules. Other after tax contributions made post 1986 will be tax free in a Roth conversion on a pro rated basis based on the share of after tax amounts to the remaining total amount. A conversion to a Roth IRA is taxed in the same manner as a distribution to the taxpayer except that for 2010, the conversion income can be split between 2011 and 2012.
If client does not want a conversion tax liability, all he can convert is the pre 1987 after tax contribution amount by itself.
Distributions from the Roth are taxable under the ordering rules prior to the Roth IRA becoming qualified. First out are regular contributions and next out are conversion contributions starting with the oldest, and for each year’s conversions the taxable amount comes out prior to the tax free amount. Last out are the earnings. Under these ordering rules, when 2010 conversions are distributed prior to 2012, the conversion tax is accelerated into the year of distribution. This means that a 2010 Roth conversion cannot be used for cash flow reasons where the conversion is withdrawn and the taxes on it delayed until 2011 and 2012. Therefore, several factors come into play including his age and the year of his first Roth IRA contribution, and whether he will actually be withdrawing 2010 conversion funds prior to 2012.
If he has no prior Roth IRA, converts only the pre 87 after tax amounts, the conversion is tax free and since there are no taxes on the conversion, withdrawal of those funds from the Roth IRA will not trigger any accelerated tax bills.
If client is still working there, the plan could allow for certain classes of the balance to be eligible for in service distributions but not others. So there are several variables in this situation that could affect conversion taxation and also taxation for the year of distribution from the Roth IRA.
Permalink Submitted by Brent Steiner on Thu, 2010-04-15 19:34
On the pre-87 piece – $60,000 is basis – the other $80,000ish is gain
Permalink Submitted by Alan Spross on Thu, 2010-04-15 19:47
Then only the 60k would be available to convert separately and tax free.