profit-sharing plan withdrawal options
I am a 69 year old still-practicing dentist with a profit-sharing plan through my “C” corporation. I have $25,000. in a segregated account within the plan which has an $8,000. basis from previous post-tax contributions. All accounts in the plan total $300,000. Can I take a distribution solely of the $8,000. and could I roll it directly to a Roth-IRA or do I have to use the “pro-rata” rule as with distributions from a traditional IRA? If using the “pro-rata” rule is necessary, do I have to consider the entire profit-sharing plan balance or only the segregated account?
Permalink Submitted by Alan - IRA critic on Thu, 2013-01-17 17:16
What is distributed from the PS plan depends on the plan provisions. If the plan allows full distribution, then pro rating applies to the entire plan balance. After 59.5, it is likely that your plan may allow such full distribution. There is a way to “isolate” your 8k basis exclusively to a Roth IRA (tax free) rollover, but it takes sacrifices. You would have to distribute the entire amount eligible, receive only 80% of the pre tax amount due to mandatory 20% withholding, replace the withholding with your other funds, roll the pre tax amount first to a TIRA, and finally, the 8k to a Roth IRA. Code Section 402(c)(2) indicates that amounts you actually receive (not a direct rollover) and that you roll over result in the pre tax amounts being rolled over before the post tax amounts. That’s why the Roth rollover comes last. But 20% of 292k is almost 60k, which you would have to come up with to complete the rollover. While you could reduce your current tax payments to get the 60 back before next year, you will still have to determine if all this is worth just getting the 8k into a Roth. Another alternative is to plan to do this late this year and reduce your current withholding or estimates starting now for 2013. That way you will have the 60k cash when you distribute the plan. SInce the 20% withholding counts as if you paid it throughout the year, you would not incur underpayment penalties as you might with a late paid estimated tax payment. Now, if you just did a direct rollover of the 8k to a Roth IRA, and received a 1099R to that effect, the IRS may well question the transaction and require pro rating of the 8k, making it almost all taxable.
Permalink Submitted by Roger Fine on Fri, 2013-01-18 21:31
I am unclear about your reference to “full distributiuon” in your response to my initial question.However, could you please address the possibility of rolling over the segregated account (containing the $8,000. basis and $17,000. in earnings) to a traditional IRA, and than rolling back into the profit sharing only the taxable $17,000 portion, leaving the post-tax amount ($8,000.) in the TIRA. That IRA would than be converted into a Roth-IRA. Would that work? The ps plan allows in-service roll-overs & can accept IRA rollovers to the plan.
Permalink Submitted by Alan - IRA critic on Fri, 2013-01-18 21:52
Assuming that you have no other SEP, SIMPLE or TIRA balance at the present time, and you requested a distribution from the PS plan, the plan would pro rate your 8k basis as part of the total plan balance you were eligible to distribute. For example, if you were only eligible to distribute the “segregated account”, then 8/25 of your distribution would be basis. But because you are over 59.5, your plan might allow you to distribute the entire 300k, and if that were the case, then only 8/300 of the amount distributed would be basis. In other words, some of the 8k of basis would remain in the plan if you did not take a full lump sum distribution. Then, once you receive the amounts you request rolled into your TIRA account, if your current plan will accept incoming rollovers from the IRA, you could roll the pre tax amount you received back into the plan. That will leave you with an IRA containing basis only, which you can then convert tax free.
Permalink Submitted by Roger Fine on Mon, 2013-01-21 03:28
In your answers to my initial questions, you stated that withdrawals of post-tax contributions (basis) from my profit-sharing plan would have to be done according to the same “pro-rata” rule which applies to traditional IRA withdrawals. This appears to be in conflict with statements I read in Ed Slott’s book “The Retirement Savings Time Bomb…”(2003 Edition). “In the past rollovers, were limited. After-tax funds were simply withdrawn tax-free since the tax on that money was already paid.”pg.42 “The problem with rolling after-tax money into an IRA is that you cannot simply withdraw that money tax-free from the IRA. This is because once its in the IRA, it gets treated he same as nondeductible contributions under what is known as the “pro rata rule”. The pro rata rule applies to withdrawals of basis in an IRA. So, if you need some or all of that aftyer-tax money in your company plan, don’t roll it into an IRA- because you wont be able to withdraw it tax-free unless you withdraw the entire IRA balance.” pg.44,45.These statements by Mr. Slott appear to indicate that there is a difference between withdrawing basis from a profit sharing plan as opposed to withdrawing from a traditional IRA. Am I missing something? Please advise.
Permalink Submitted by Alan - IRA critic on Mon, 2013-01-21 04:40
Pending IRS resolution of certain recent notices (eg 2009-68), you can still withdraw after tax money from your 401k plan tax free, if done with a direct rollover of the pre tax balance. The plan would give you one 1099R for the pre tax rollover and another one for the after tax amount showing -0- taxable amount in Box 2a.However, if you had the entire balance paid to you, the 1099R would pro rate the pre tax and after tax amounts. If your plan allows incoming IRA rollovers and also allows you to take in service distributions (your pre tax deferrals cannot be distributed until you reach 59.5), you could roll over the rest of the balance to a TIRA that was your only TIRA account, then roll back just the pre tax IRA amount to the plan. That would leave the 8k in your IRA and you could convert it tax free to a Roth IRA. Whether these steps can be done depends on your plan provisions and age.