Simple IRA conversion to 401K
I have a employer in New Jersey (S corp) that wants to convert his SIMPLE IRA to a 401K plan. I have two questions. Will the participants pay New Jersey income tax again when the withdraw in the future on all dollars unlike the IRA, where basis is segregated? Second, are the owners (two partners) allowed to take a loan (plan does allow for loans) from the rollover source of the SIMPLE IRA? I was told that once the funds are rolled to the 401K, the funds are available to borrow. Can you confirm this?
There seems to be much confusion amongst CPA’s.
Thanks!
Permalink Submitted by mk foss on Tue, 2011-02-08 22:31
I’m not sure that I’m totally following your question.
Basis is not segrated in an IRA and it is recovered pro-rata. You can’t transfer IRA basis to a qualified plan – so I assume that you’re asking whether basis (after-tax contributions) to a 401k plan are segregated. They are accounted for separately and will be tax-free eventually but the tax treatment depends on how the 401k plan is distributed. See IRS Notice 2009-68 and the discussions of it on this forum.
Unlike an IRA, SEP or Simple – qualified plans can offer loans to participants even though they are owners of the business. Before the EGTRRA changes made in 2001, partners were prohibited from taking loans ftom the qualified plan of the business. As long as the Simple Plan was in place more than two years, I don’t see that a loan would have to be sourced back to where the funds came from originally.
Most CPAs I know prefer other retirement vehicles to SIMPLE IRAs – it may be why you’re finding confusion.
Permalink Submitted by Alan Spross on Tue, 2011-02-08 23:10
This question may relate more to the NJ treatment of IRA contributions as non deductible on the state return. That means that an IRA including a SIMPLE IRA, may contain basis for state but not for federal purposes. While I would refer this question to a NJ practitioner, I would guess that the rollover of a SIMPLE IRA to an employer plan would be allowed using the federal rules and would not be affected by the state basis that exists. It would then fall on the state tax forms to adjust distributions from the receiving QRP to avoid double taxation when these basis amounts are eventually distributed from the QRP.
All I could find on NJ is that only 401k plans allow pre tax contributions from NJ taxpayers, so I guess that means all other plan types do not allow pre tax contributions.