DB Plan after-tax to Roth
Sorry, yet again another post tax to Roth IRA question. Wish the IRS would come out with some sort of guidance. Client has not retired and has after-tax contributions in a
DB plan. Client is not ready to retire but would like to remove after tax money from DB plan to a Roth IRA. Plan provider is willing to send funds (via direct payment to client). Is client permitted to then fund Roth IRA?
Thank you.
Permalink Submitted by Alan Spross on Fri, 2012-11-30 04:01
If the plan provides for in service distributions, the amount distributed should include pro rated pre tax and post tax amounts. If the check is made out to the client, there will be 20% mandatory withholding on the pre tax portion. The client can then first roll the pre tax amount to a TIRA and after that is completed roll the after tax amount to a Roth IRA. The amount that was withheld will have to be replaced to complete those rollovers.
This is the only safe way to “isolate” basis, ie get the pre tax amount entirely in the TIRA and the post tax amount entirely in the Roth IRA. These rules only apply if the client receives the distributions and does the rollovers in the right order (Code 402(c)(2)). Trying to do this by direct rollover is problematic due to incomplete IRS Notices and 1099R instructions, but the IRS intends direct rollovers to different IRA types to be pro rated with respect to basis, not isolated.
Permalink Submitted by Anonymous (not verified) on Fri, 2012-11-30 04:10
Thanks for the response. For whatever reason this plan permits in-service distributions of the post-tax only. Since the amount distributed is post tax there is no 20% withholding. I am beginning to think that this plan may not be in compliance with IRS 2009-68.
Permalink Submitted by Alan Spross on Fri, 2012-11-30 04:51
Pro rating would only apply to the portions of the plan that are eligible for distribution. After separation, the entire plan balance is eligible, but a plan may include provisions that only allow after tax amounts to be distributed while still employed. If that is the case here, there is no pre tax amount to pro rate.
This makes things simpler. Just request either a check for an indirect rollover or request a direct rollover from the plan to a Roth IRA.
Permalink Submitted by Anonymous (not verified) on Fri, 2012-11-30 11:36
Thanks Alan. If client chooses indirect rollover anything need to be done on the tax side when he files return?
Permalink Submitted by Denise Appleby on Fri, 2012-11-30 12:49
[quote=”[email protected]“]. I am beginning to think that this plan may not be in compliance with IRS 2009-68.[/quote]
I have come across some plans that have chosen to ignore Notice 2009-68. So far, none have been able to provide any explanation as to why or on what basis. In all cases so far, none of the plan representatives were even aware of the Notice, and responses to written requests are usually provided in ‘form letters.