roll over with basis
I have a client who is trying to roll over funds from an employer plan to an IRA. The check was properly titled to the new custodian FBO of the participant but the amount included after tax money. Should we insist on have the first institution cut two checks?
If they will not, can the funds be deposited into the IRA account and then the after tax funds withdrawn or will the CPA simply need to show each withdrawal as split between bais and taxable?
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Permalink Submitted by Alan Spross on Tue, 2010-02-09 19:19
What does the client want to do with the after tax funds?
The question of the day is how to roll the pre tax amount to a TIRA and the after tax amount to a Roth IRA, which is what most want to do. But the IRS has not clarified if this can be done without pro rating the after tax funds to each type of account.
Once these funds reach a TIRA, they cannot be pulled out of the TIRA or converted to a Roth IRA without pro rating the after tax and pre tax amounts. Client would have to file an 8606 on his TIRA reporting the amount of after tax contributions rolled into the IRA, and then future distributions or conversions would be pro rated.
If client just wants the after tax money to be kept out of IRAs for current needs, etc, the plan would have to reissue as separate checks, and they might not be willing to do that once the check has been cut.
Permalink Submitted by Alan Spross on Thu, 2010-02-11 18:04
Thank you for posting that article. For the most part it explains the problem fairly well, but it could have further clarified that if a distribution is made directly to the employee and the employee does the rollovers and CAN AFFORD to replace the 20% withholding, the pro rata rules are avoided per provisions already in the tax code. But many people cannot afford to front the 20% for lump sum distributions.
As for the conflict between incomplete Notice info from the IRS and plan administrators still making the wrong decisions in completing the 1099R, this is indeed a potential massive problem and the dollars caught up in it are increasing by the day.
The Employee Benefits Council sent a letter to the IRS late in October pleading for them to clarify the assignment of basis to various types of distributions, but still no response from the IRS as far as I know.
As for this poster, it is not clear exactly what this client wants to do with the after tax money, as a Roth conversion was not mentioned. Of course, if the client does not need that after tax money for current expenses, they might well be running head long into this problem.