IRA rollover to qua plan
Below is an real life scenario. My understanding is the IRS law prohibits an IRA rollover to a qualified plan of after tax dollars. Is that correct? Beyond that I am not aware of any comingling rule. In other words you simply can not roll after tax dollars to the plan therefore the after tax dollars continue to reside in the IRA. Looking at the below scenario, I am guessing that the brokerage repr is possibly citing the firm policy or alternatively, citing the plan document. I would appreciate any feedback from this forum! Could be that I misunderstand this rule – I don’t see this every day. 😀
Thanks
Jim Magno
Client told the guy at brokerage house that we are converting all post tax contributions from IRA to Roth IRA; and the balance of the IRA (all pre-tax money) in the IRA is going into an Individual K. He said the Roth conversion is fine, but that we couldn’t roll over the remaining pre-tax IRA money to an Individual K because the IRA had “commingled” the pre-tax and post-tax contributions. He said it doesn’t matter that we try to separate the pre-tax and post-tax contributions; once the money was commingled that made the IRA disqualified. If the commingling had not occurred, he said we could have rolled over the IRA into brokerage’s individual K plan.
Permalink Submitted by Alan Spross on Mon, 2010-11-29 23:44
Jim, you are correct about your impressions and probably also correct that the broker is citing the plan provisions or policy.
The brokerage is not recognizing the changes in portability that were made in 2001. When IRA funds are rolled into a qualified plan, the pre tax balance of ALL of a person’s IRA accounts are deemed rolled over first, so the commingling factor no longer applies. It is a violation if a qualified plan receives after tax contributions, but that does not mean that it cannot happen. The commingling rules expired in 2001 and the basis in a taxpayer’s IRA accounts applies over all those accounts. It is not locked into specific accounts. That said, many plans are still using rules that forbid the plan to accept any IRA balances that are not from a “conduit (aka rollover) IRA”, and this is probably what you face here. If the plan will not accept the rollover, the strategy of the tax free conversion is aborted.
These plans still use the old rules because it makes them feel safer about inadvertantly receiving more IRA dollars than the pre tax balance. They may be safer, but not totally safe because a taxpayer could have rolled after tax money to any conduit IRA since 2001. The administrators feel that this probably has not happened very often, so still feel safer sticking with the plan rules they had prior to 2001.
What all this means is that it is preferable to complete the rollover to the qualified plan prior to doing the conversion, because that is the difficult part. If the conversion is done first, and the plan will not accept the remaining rollover, the client either has a mostly taxable conversion OR will have to recharacterize the conversion.