Are you under 59 1/2? Usually when a company allows in-service distributions for only company match money (non-elective contributions) it is because you not 59 1/2 yet. I ask because you asked if you have to include your company match.

I am not aware that direct transfers to Roth’s or Traditional IRAs at this point allow you to cherry pick the basis. Unless additional guidance has been released very recently, the Service has stated that direct conversions are treated pro-rata, not a separation of basis. This has been a hot topic on this board which you can probably browse and read about quite a bit.

As far as telling you that you should convert, many more variables need to be considered in an engaged situation with a professional.

• Flag as spam
• Log in to Reply

There is no authoritative answer to this scenario, as it is a spin off of the basic “isolation of basis” debate that needs further clarification from the IRS. In this situation, the way that Fidelity will issue the 1099R forms will be a major factor in how the IRS will review your conforming tax return reporting the distributions and conversion.

In view of the above, I will speculate on how the IRS would must likely view this if they looked into it. They would use the pro rate rules and apply them to the plan balance you are eligible to distribute, ie both classes of contributions and earnings. Therefore, unless you have pre 87 after tax contributions that can be separately distributed at your request as part of the after tax total, the same pro rate factor would apply whether you opted to include the pre tax match and earnings or not, because you are eligible to take both classes out. This is another issue that has not been clarified, but would seem to be generally supported by Notices 2009-68 and 2009-75. That said, the IRS gives wide latitude to the 1099R from employer plans because they trust that these are correct in relation to IRA distributions where the custodian has no idea of what the taxable basis is. If the employer plan enters a dollar figure in Boxes 2a and 5, the IRS will usually not question it.

But there remains the risk that the IRS makes a ruling that requires the plan administrator to revise a previously issued 1099R according to new instructions. I think that the chaos that would exist by forcing revisions to a 1099R that is already issued is such that once you get the 1099R, you are probably home free, but again this is pure speculation on my part.

Re your last question: If you do the indirect 60 day rollover of your distribution, you will have to replace any 20% withholding, but you would be on more solid ground by rolling the pre tax amount with replaced withholding over first to a TIRA and then the remaining after tax amount to a Roth IRA in a tax free conversion. Sec 402(c)2 clearly indicates that the participant who receives a distribution of pre tax and after tax amounts, and does a rollover, that the pre tax amounts are deemed rolled over first, so you do the first rollover to the TIRA.

• Flag as spam
• Log in to Reply

I don’t think we ever established whether you have pre 1987 after tax contributions in your plan. That may be pertinent here, but those would come out without earnings.

With respect to separate distributions, other than the above question, I don’t see that it matters. Perhaps Fidelity can explain how they feel that would change anything, but if my prior presumption is correct it wouldn’t since the pro ration would be based on the amounts you were eligible to distribute even if you opted to only remove one of those two classes you outlined.

If you are going with the indirect rollovers for one or both classes, you would definitely need to know that total amount of pre tax distributions Fidelity will report from whatever amount you elect to receive. You would roll that pre tax amount over first to the TIRA and then the rest to a Roth IRA. There should be no risk of problems if you do it this way. Trying to do a direct rollover of all or part to avoid withholding is where you trigger problems according to the IRS Notices of last year.

It is possible that Fidelity requires the separate dates to processing issues rather than their idea of tax pro rating issues.

• Flag as spam
• Log in to Reply

Maybe not the cleanest, but the safest if you do not want to worry about what the IRS might do. The 20% mandatory withholding for distributions made to you only applies to the pre tax amount distributed.

• Flag as spam
• Log in to Reply

You can do a direct rollover to a TIRA of the entire balance, but once these funds are added to your TIRA, it will change the % of basis in your TIRA. You would file an 8606 to report the added basis to your TIRA from the after tax amount of the rollover, and the conversion from the TIRA would be pro rated between after tax and pre tax using Form 8606. In other words, you would report the added basis on one part of the 8606 and report the conversion on another part.

If you have both a TIRA and employer plan that you can convert, it is best to convert the one with the highest % of basis first. That gets more dollars into the Roth per tax dollar paid. If you combine these accounts before converting, you will end up with a new average basis % and a higher portion of your conversion will be taxable than if you converted only the higher % basis account separately.

• Flag as spam
• Log in to Reply