Can you rollover after-tax IRA $ to a QP
[code][/code]a client has an IRA that includes both after tax contributions as well as money from an old 401K. Is it possible to rollover the entire IRA to his new 401K. The pre-tax dollares are pretty clear that they can, but I’m confused on the aftertax dollars. Appears to be conflicting guidance?
on one hand From IRS http://www.irs.gov/publications/p590/ch01.html#en_US_2010_publink1000230568
IRA as a holding account (conduit IRA) for rollovers to other eligible plans. If you receive an eligible rollover distribution from your employer’s plan, you can roll over part or all of it into one or more conduit IRAs. You can later roll over those assets into a new employer’s plan. You can use a traditional IRA as a conduit IRA. You can roll over part or all of the conduit IRA to a qualified plan, even if you make regular contributions to it or add funds from sources other than your employer’s plan. However, if you make regular contributions to the conduit IRA or add funds from other sources, the qualified plan into which you move funds will not be eligible for any optional tax treatment for which it might have otherwise qualified.
on the other…
Kinds of rollovers from a traditional IRA. You may be able to roll over, tax free, a distribution from your traditional IRA into a qualified plan. These plans include the Federal Thrift Savings Fund (for federal employees), deferred compensation plans of state or local governments (section 457 plans), and tax-sheltered annuity plans (section 403(b) plans). The part of the distribution that you can roll over is the part that would otherwise be taxable (includible in your income). Qualified plans may, but are not required to, accept such rollovers.
Tax treatment of a rollover from a traditional IRA to an eligible retirement plan other than an IRA. Ordinarily, when you have basis in your IRAs, any distribution is considered to include both nontaxable and taxable amounts. Without a special rule, the nontaxable portion of such a distribution could not be rolled over. However, a special rule treats a distribution you roll over into an eligible retirement plan as including only otherwise taxable amounts if the amount you either leave in your IRAs or do not roll over is at least equal to your basis. The effect of this special rule is to make the amount in your traditional IRAs that you can roll over to an eligible retirement plan as large as possible.
Permalink Submitted by Alan Spross on Tue, 2011-02-01 18:05
After tax amounts in IRA accounts cannot be accepted by a qualified employer plan, and one of the rules you cited specifies that tranfers to a QRP from an IRA are deemed to come first from pre tax amounts.
This is not to say that disallowed transfers of post tax IRA dollars do not find their way into QRPs, but this subjects the QRP to sanctions and corrective actions. I have heard of possible disqualification of the QRP if this happens, but I doubt if the IRS would go that far. However, plans know that they cannot accept after tax IRA dollars and this is why many of them will only accept rollovers from conduit IRAs. In no way does this eliminate their exposure because conduit IRAs themselves might include after tax rollovers since 2002, or the taxpayer might make non deductible IRA contributions into those accounts. Nonetheless, plans that limit rollovers to conduit (aka rollover) IRAs reduce their exposure considerably by maintaining that policy.
Many taxpayers are trying to roll as much of their pre tax IRA balance as possible into their QRPs. The basis that is left in their IRAs can then be converted to Roth IRAs tax free.