Rollover of basis
Pub 590 says:
[i]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. [/i]
Does this mean that as the TIRA holder, I can [b]elect [/b] to either rollover the TIRA basis to the QRP or leave it in the TIRA at my choosing (assuming of course, the QRP would otherwise accept rollover basis)??
BruceM
Permalink Submitted by mk foss on Sat, 2011-04-09 19:28
It means that the QRP will not accept basis as part of an IRA rolled into the plan.
This rule has provided an opportunity for folks doing Roth conversions to transfer all pre-tax money (contributions plus earnings) to the QRP leaving the IRA full of nondeductible contributions that can be converted tax free to a Roth.
Permalink Submitted by BruceM on Sun, 2011-04-10 00:23
Yes, this is how I’ve always understood it…but this doesn’t seem to be what the IRS is saying, when it says the benefit of the ‘special rule’ is in allowing the amount of the roll over to be as large as possible, which means to me the ability to rollover basis.
BruceM
Permalink Submitted by Alan Spross on Sun, 2011-04-10 01:15
Bruce,
The IRS is trying to square up the the usual IRA pro rate rules with the fact that a QRP cannot accept basis. Although the code says that the first dollars rolled over to a QRP are deemed to be the pre tax amounts, there had been a question among some experts whether the rules called for a or b:
Example a) IRA accounts of 100k hold 20% basis. Taxpayer distributes 30,000 but is only allowed to roll 24,000 to a QRP and must keep the other 6,000.
or
Example b) Same IRA account as above. Taxpayer distributes 30,000 and it is deemed pre tax so all 30,000 goes to the QRP.
Pub 590 is clarifying that b is correct. And that accounts for the statement re rolling over the largest amount possible. Whatever amount is distributed up to the pre tax max goes to the QRP and the rest stays in the IRA. This also has the added benefit of less exposure to QRPs of inadvertantly acquiring IRA basis. I don’t know that EPCRS has an easy corrective measure for a plan that gets IRA basis, at least I did not see one when I did a cursory review. Some have alleged even possible QRP plan disqualification if they end up with IRA basis, although I never heard of a plan actually being disqualified.
Many QRPs will only accept “rollover IRA” incoming balances because they either think they will not get basis from these rollover accounts OR they think the exposure to basis is much reduced. But since 2002, a rollover IRA can also include QRP after tax contributions, and many IRA custodians have no standards for titling an IRA account as a rollover IRA. Many keep the “rollover” title on the account if it started as a rollover no matter how many regular IRA contributions were made to it afterward. So really, QRPs are not safe even when limiting incoming rollovers to rollover or conduit IRA accounts.
As Mary Kay indicated, this is a good opportunity for people with heavy IRA basis per Form 8606 to transfer out the pre tax balance and then convert that basis to a Roth IRA tax free. If their QRP allows in service distributions they can then roll them back in the next calendar year to an IRA and their TIRA will have been purged of it’s 8606 basis.