Transfer After Tax Retirement Plan to Roth IRA
A client separated from service and had a retirement plan with his former employer with only after tax contributions and earnings. Is he permitted to transfer the entire account to a Roth IRA, or must his earnings be rolled over to a Rollover IRA and only his original contributions may be moved to his Roth? Either way, he does not want to leave that account with his former employer and is looking for options. He makes over $100,000 per year.
Thank you.
Permalink Submitted by Alan Spross on Thu, 2008-07-03 16:54
The direct Roth conversion from an eligible retirement plan still carries the 100,000 MAGI limit until 2010, same as for conversions done through a TIRA.
Other than that problem, he would have been able to transfer the entire amount to a Roth IRA, and would only be taxed on the pre tax value.
Permalink Submitted by Jonathan Sard on Thu, 2008-07-03 17:09
But this is not a Roth conversion because all contributions were made with after tax dollars. No pre-tax contributions were made. If he still can’t put the money into a Roth IRA, what are his options?
Permalink Submitted by Alan Spross on Thu, 2008-07-03 17:23
It’s still a Roth conversion, just as converting a TIRA to a Roth that contains non deductible contributions. It just means that the after tax amount is not taxed again at the time of conversion. This is also the result if the after tax amount is just distributed to the client and not rolled over, as was required prior to 2003. The direct Roth conversion is new this year and was established under the Pension Protection Act.
If he cannot do the conversion until 2010 because he will exceed the 100,000 MAGI this year and next, he could still rollover the entire amount to a TIRA and file Form 8606 to report the basis in his TIRA. He could then convert in 2010 or later. However, since he has a high % of basis in the employer plan, he might be better suited to leave it there until 2010 and then convert directly. That may get a greater amount into the Roth with a lower tax bill if he already has a TIRA with considerable value. Once he puts everything into the TIRA, his total basis will probably be reduced to a lower percentage of the total value meaning the tax bill per dollar converted would be higher.
Permalink Submitted by Al Fry on Thu, 2008-07-03 18:12
You stated in your first post that all the contributions and earnings were post-tax. If this is in a qualified retirement plan, then the earnings would be pre-tax.
Permalink Submitted by Jonathan Sard on Thu, 2008-07-03 19:23
So his earnings would be subject taxation if he did a Roth conversion in 2010?
Permalink Submitted by Alan Spross on Thu, 2008-07-03 20:00
Yes.
Earnings have not yet been taxed, and therefore will be taxed upon distribution or conversion to a Roth. However, once in the Roth earnings from that point on are tax free once the Roth is qualified.
The original contributions, if after tax, were taxed prior to being contributed to the plan and therefore can be distributed from the plan without further tax.
To avoid confusion the terms after tax or pre tax refer to the tax status upon contribution to plans as opposed to the tax status upon distribution.