Roth Conversion w/PSP and TIRA
If a client wants to move SOME money via an in service withdrawal from his PSP plan to his TIRA, assuming he currently has some after tax money inside of his TIRA, can the client do a Roth IRA conversion of just the TIRA right now, and then immediately thereafter transfer his remaining 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 at some point during the same TAX year, even though it was done in a two step process?
Permalink Submitted by Alan Spross on Mon, 2010-02-15 17:23
Client must wait until 2011 to roll the PSP over, or the pro rate rules would apply to the year end TIRA balance and cause most of the earlier conversion to be taxable. And then the client must opt out of the 2 year deferral of the conversion income. If he does not opt out, then the PSP rollover would have to wait until 2013 to prevent it from being included in the year end balances for 2011 and 2012. If included in those balances it would increase the taxable conversion that was not reported until those years.
You mentioned that the client wanted to transfer “some” money to the TIRA. Whatever amount is chosen would affect the pro rate factor, obviously the more transferred the higher the taxable portion would be.