Non-deuctible $ Roth Conversion from Qualified Plan
If a particpant in a qualified plan rececives his plan distribution which includes non-deductible $ and he rolls over/converts only the non-deductible $ to a Roth IRA, will the non-deductible portion be taxed under the pro rata rules or will the whole amont of the non-deductiobel Roth Conversion be tax-free?
Permalink Submitted by Alan Spross on Thu, 2011-07-07 17:54
The IRS intends that distributions be pro rated between basis and pre tax amounts, and that is how a direct rollover should be treated, ie a pro rated amount of basis would go to the TIRA and also to the Roth IRA.
That said, if the participant receives a distribution made out to the participant, they can avoid the pro rating and isolate the basis to the Roth IRA. But doing this requires the participant to replace the 20% withholding on the pre tax portion to complete the rollovers. The participant first rolls the pre tax amount over to a TIRA, and after that is completed rolls the after tax amount to a Roth IRA in a tax free conversion, replacing the withholding as needed.
The difference between an indirect 60 day rollover and a direct rollover is due to Sec 402(c)2 of the tax code that indicates that distributions RECEIVED by the employee and rolled over are considered to be first composed of the pre tax amounts. This would result in both rollovers being tax free with the basis isolated to the Roth IRA.