Company Plan to IRA rollover of after-tax $’s

Submitted by Janis Sleeter on Mon, 2013-02-11 22:38

I have a client in a Savings & Profit Sharing Plan. The bulk of the money is pre-tax.
With the changes in rollovers and Roths, I wanted to double check the options available for the after-tax money for 2013 distributions.

1)I know he could roll all funds over to a traditional IRA (custodian to custodian transfer preferred) keeping track of the after-tax dollars for the “cream in the coffee” distribution rule.

2) I think you used to be able to have the company distribute the after-tax dollars outright to the participant if done on a separate check without any penalties or income taxes due as long as the participant is 59.5 or over. Is this a current option?

3) With the new Roth changes, if the company issues a separate check for the after-tax dollars could the participant roll that directly into a Roth IRA? (custodian to custodian transfer preferred).

I know that in all cases you want to make sure the plan issues the 1099-R’s correctly.

Would appreciate input on this.



Submitted by Alan - IRA critic on Mon, 2013-02-11 23:20

Is client still working for this employer?



Submitted by Janis Sleeter on Tue, 2013-02-12 21:17

no



Submitted by Janis Sleeter on Tue, 2013-02-12 21:17

no



Submitted by Alan - IRA critic on Tue, 2013-02-12 21:52

  • He could do 1), but it’s not a desirable option.
  • 2) is also an option, and being 59.5 is not required.
  • 3) is highly problematic due to IRS Notice 2009-68, which indicates pro rating would apply. That said, taxpayers have been doing these twin direct rollovers for 3 years now without challenge from the IRS. But the safest method that is not subject to challenge is to request a distribution to the client and client then does first the rollover of the pre tax amount to a TIRA and then the after tax amount to a Roth IRA. The issue with this however is that 20% withholding will apply to the pre tax portion and client would have to replace withheld dollars to complete the rollovers. He may not have enough cash to that. But if he does, it is the safest way to proceed.
  • Alternatively, if the plan provisions relative to the separate account (after tax contributions and earnings) allow for only separate account funds to be distributed alone, he could request direct rollover of that portion this year and the rest of the plan (all pre tax) next year.  That should obviously be clarified with the plan before acting.


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