IRS Notice 2014-54 – After-tax Monies Rollover to Roth
Less than 59 ½ years old; 401K plan allows in-service withdrawal/rollover per below:
Rollover Amount: $500k
Taxable Amount: $300k
Non-Taxable Amount: $200k
Per IRS Notice 2014-54 I want to direct 100% of the Taxable amount to a Rollover/Traditional IRA account. I want to direct 100% of the Nontaxable amount to a Roth IRA account. My 401K plan will only allow one direct rollover per distribution. Therefore, I can’t construct this transaction with two direct rollovers. I am thinking of the following: 1) Perform a direct rollover of 100% of the Taxable (300k) amount to a Traditional IRA. 2) Ask for a distribution, payable to me, of 100% of the Non-taxable (200k) amount.
Under the guidance of 2014-54 the Taxable amount of the distribution will automatically be allocated to the direct rollover; and in this example, that is to the Traditional IRA account. Since Taxable money is first allocated to any direct rollovers; and the money is first allocated to any direct rollovers; and money going to the traditional IRA is the only money being directly rolled over.
Therefore, the remaining amount made payable to me (200k) must represent 100% of the Non-taxable amount. This amount would not be subject to the mandatory 20% withholding. I would then perform a 60-day rollover to a Roth IRA completing the transaction.
WOULD THIS BE A VALID TAX-FREE ROTH CONVERSION TRANACTION PER 2014-54? CAN ANYONE SEE ANY HOLES IN THIS TRANSACTION STRUCTURE?
Permalink Submitted by Alan - IRA critic on Thu, 2014-12-04 17:32
You came up with the best solution given the plan’s rollover restrictions. There should be no problem with the IRS on proceding this way. The only possible pitfall would be if the plan itself does not recognize that pre tax amounts are rolled over first and proceeds to withhold some part of the second distribution. You would then have to come up with the withheld amount to complete the Roth rollover. I suggest requesting the direct rollover in terms of the taxable balance in the plan, and the distribution as the non taxable amount, and specify that there is no mandatory withholding on the non taxable amount. IRS Code reference 402(c)(2).
Permalink Submitted by David Mertz on Thu, 2014-12-04 18:36
If the plan does not recognize that the pre-tax amounts are rolled over first, I would also be concerned that the two Forms 1099-R needed to report this would not show the correct amount in box 5 of each and in box 2a for the part paid to you. This might create a bit of a problem with convincing the IRS (and tax preparation software) that these two forms are reporting parts of a single distribution as described in Notice 2014-54. If Notice 2014-54 is followed, I believe that the code G Form 1099-R for the direct rollover should show zero in boxes 2a and 5 (or a blank box 5) and the code 1 or 7 Form 1099-R for the non-taxable amount paid to you should have a zero in box 2a and the entire box 1 amount in box 5. With both forms showing zero in box 2a, there should be no mandatory withholding. I suppose the plan could just mark box 2b Taxable amount not determined, leaving it up to you to determine how it is to be reported, but I would still be concerned about how the IRS would react to it and that would still leave questions about mandatory withholding.