IRA to PSP to Roth Conversion IRA
A client has money in his company profit sharing plan (he is the owner of the company and trustee of the plan) and he also has an IRA with an outside custodian.
His IRA is worth $500,000, of which $40,000 was after tax contributions. Is he permitted to move $460,000 of his IRA into his company PSP and then convert the remaining $40,000 of after tax contributions to a Roth IRA, thus avoiding the pro rata rules of his IRA assets? This would allow him to convert only the $40,000 of remaining after tax IRA assets to a Roth IRA without having to pay any tax on the conversion. This seems like this would be a major loophole to avoid the pro rata rule on doing Roth conversions, but I haven’t seen anything indicating that this is not permitted. Thank you for your help!
Permalink Submitted by Alan Spross on Mon, 2010-02-08 22:22
Loophole or not, this is permitted.
But the PSP document must allow for incoming IRA rollovers or the plan cannot accept the IRA pre tax amount. The plan can be amended if it does not allow this currently.
To make this work, an 8606 must have been filed for the years a non deductible TIRA contribution was made. If an IRA rollover from a prior QRP contained after tax contributions, that also must be reflected on the 8606 so that the IRS shows documentation for the 40,000 of basis.
The IRS rollover to the PSP should be done first, and then the conversion done right away after the plan has accepted the rollover. Client may also want to make a 2009 and 2010 non deductible contribution to the IRA prior to the conversion so the conversion catches all possible after tax balances.
Permalink Submitted by Jonathan Sard on Tue, 2010-02-09 14:06
Similar question. If the client wants to move money via an in service withdrawal from his PSP plan to his TIRA, but he currently has some after tax money inside of his TIRA, can the client do a Roth IRA conversion of just the existing IRA right now, and then immediately thereafter transfer his PSP money into his TIRA and not have to worry about the pro rata rule.
He has $500,000 in his PSP and $50,000 in his TIRA. Of the $50,000 TIRA, $20,000 is after tax contributions. He was going to convert the $50,000 TIRA this month so he only has to pay tax on the $30,000 pre tax contributions and growth…and then next month he was going to do an in service withdrawal from his PSP to his IRA. Is it appropriate to do this strategy, or will the IRS make him use the pro rata rule since he would have had these monies all in his IRA during the same TAX year, even though it was done in a two step process?
Thanks again!!