In Service Distribution PreTax / After Tax IRS Notice 2014-54

Submitted by David Berdow on Wed, 2022-01-26 15:55

Feedback is asked of the following summary below and its feasibility.

A client has 1.4 million dollars in a 401(k) plan at work with several moving parts, Pre-tax, after tax and ROTH.
The breakdown (contributions and earnings) is approximately $346K after tax, $93K ROTH and the balance pre-tax. He wishes to move 1 million of the 1.4 million out of the workplace retirement plan.

He will stay employed with 400K remaining in the plan and continue future contributions (Pre-Tax, ROTH and After Tax). The plan allows in service distributions (over 59 ½) and allows source specific withdrawals. My concern is pro-rata rules as I am getting mixed feedback from multiple sources. Can he do the following as the goal is no taxable event and future IRA distributions are all taxable while ROTH IRA distributions are all tax free including the earnings from the ROTH IRA.

Earnings associated with the post-tax account are transferred his self-directed IRA. (Pre-Tax) (Check#1 FBO)
The tax deferral/pre-tax account will be rolled over to the self-directed IRA. (Pre-tax) (Check #1 FBO)
After tax contributions are transferred to a ROTH IRA. (Post Tax) (Check#2 FBO)

Two checks are cut one for each “bucket” of money. 1. After Tax (ROTH IRA) 2. After Tax Earnings (IRA) & Pre-tax contributions and earnings (IRA).

I was reading IRS Notice 2014-54 under example #4.

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Permalink Submitted by Alan - IRA critic on Wed, 2022-01-26 16:27

It’s doable, but the key is making the direct rollover requests clearly, and having an experienced employee of the plan administrator processing the direct rollover amounts correctly, and then updating the remaining plan component balances correctly. Some plans will issue one check, but separate checks as you outlined payable to the IRA custodians FBO client’s IRA and client’s Roth IRA will help reduce the risk of the IRA custodian making contribution errors. Apparently, the Roth 401k balance is not involved here, and that is wise to address that at a different time and not over complicate the current rollovers.
Client should follow the rollover closely, and report any errors ASAP. If the direct rollover checks are mailed to the client for delivery to the IRA custodian, client should closely examine the amount and payee for the checks and make a copy of them just in case the IRA custodian mishandles the contributions.
The plan administrator might issue a single 1099R for these rollovers because the Box 7 coding is the same. However, the instructions for Boxes 2a (which should be 0) and Box 5 differ due to the differing destination accounts. This causes an entry issue for some tax programs. The solution to that problem is to have the tax preparer break down the 1099R into 2 separate amounts, one for the direct rollover to the Roth IRA and the other for the TIRA.