Rollover basis
If an individual rolls over the balance of a former employer’s qualified retirement plan that has a small amount of after-tax basis, and this is rolled into a Conduit IRA that is titled as a conduit that is not comingled with this individual’s current IRA balance(s) (that is, it is kept separate and distinct)….and this person later rolls this to a new employer’s qualified plan, may the basis be included in the rollover, assuming the new plan will accept and account for basis?
Thanks
BruceM
Permalink Submitted by Alan Spross on Mon, 2010-11-29 17:33
Bruce,
Short answer is No. No after tax basis can be rolled from an IRA account into a qualified employer plan or the plan will face onerous corrective procedures or possible disqualification. This exposes the fallacy when many plans think they are insulating themselves from receiving after tax amounts by restricting rollover to conduit IRAs. They seem to have forgotten that since 2001, after tax amounts in an employer plan can be rolled into the conduit IRA and an 8606 filed. Or they may be aware of this exposure and just figure that most people just take the after tax distribution in cash, and therefore the limit to conduit IRAs improves their chances of not receiving after tax amounts. Plans can only account for basis if the basis comes from other qualified plans, eg 401k to 403b rollover.
Another factor is that any basis in an IRA is completely fungible between accounts. So in your example, if after tax dollars were rolled into the conduit IRA, and the individual had another contributary IRA holding pre tax dollars in excess of the after tax amount rolled to the conduit IRA, then the conduit IRA could be completely rolled to an employer plan and no basis would be transferred. The rule is that over all of an individuals TIRA, SEP or SIMPLE IRA accounts, any amounts transferred to a qualified employer plan are deemed first to come from the overall pre tax balance. Accordingly, under this rule the full conduit IRA value could be transferred and the after tax amount would then reside in the remaining IRA accounts. When it comes to IRA basis, commingling is not a factor any longer like it used to be prior to 2001.
Permalink Submitted by BruceM on Tue, 2010-11-30 00:46
Alan:
Thank you for your, as usual, clear and cogent reply and elaboration on the fungibility (not sure if thats a word or not) of TIRA basis.
While I’m here, I’ve often wondered what charictaristics of a QRP carry over to a conduit IRA. For example, I understand that the assets in a conduit IRA are protected by ERISA unlimited protection from creditors. But I also understand that all withdrawals from a conduit fall under IRA rules, not the rules effecting QRPs. For example, the age 55, separate from service and withdraw prior to 59.5 and avoiding the 10% early withdrawal penalty will not apply to a conduit IRA…correct? And the balance in a conduit IRA must be used in calculating the owner’s RMD at 70.5, even though he continues to work for the employer and is less than a 5% shareholder…correct?
Are there any other characteristics of a QRP that carryover to a CIRA that you can think of?
Thanks
BruceM
Permalink Submitted by Alan Spross on Tue, 2010-11-30 03:31
Correct on all your questions, except that the unlimited creditor protection for conduit IRAs is a function of the 2005 bankruptcy act, not ERISA. It is not as comprehensive as ERISA protection that only applies while funds are in a QRP.
Another benefit that is currently aging out applies to those born prior to 1/2/1936. If they take an LSD to a conduit IRA and keep the conduit IRA account pure, they can roll that conduit IRA back into the same plan (after 2001) if they are rehired by the same employer, and the potential to use the 10 year tax option or capital gain treatment on a later LSD including those funds is preserved. These options are covered in Pub 575, p 19-23 and reported on Form 4972.
Can’t think of any others.
And…fungibility is actually in the dictionary……at least in my ’57 Webster’s!