New Retirement plan after tax account to Roth rollover rules
I have read conflicting comments on whether a plan participant has to take a full distribution of their entire plan balance to use the new after tax to Roth rule, or can they take a partial distribution of just their after tax amount?
Thanks!
Permalink Submitted by Alan - IRA critic on Wed, 2014-11-26 18:57
It depends on which part of the plan is being distributed. If only an after tax sub account and the earnings in that account, the rest of the plan would not be included. IRS Notice 2014-54 does not change the breakdown of what is distributed, it just allows the employee to direct the destination of the various portions to different rollover accounts. If the plan allows partial distributions, the Notice could be applied to the partial distribution as well. Whatever amount was distributed could result in the pre tax amount going to a TIRA and the after tax amount to a Roth IRA. But distributing ONLY after tax amounts cannot be done unless they are pre 1987 after tax contributions.
Permalink Submitted by Bruce Edger on Wed, 2014-11-26 19:07
So on a go forward basis, a participant could make after tax contributions and (if the plan allows) take an immediate partial distribution consisting of that after tax account and roll it over to their Roth? Similar to the non deductible IRA conversion to Roth strategy.
Permalink Submitted by Alan - IRA critic on Wed, 2014-11-26 19:19
Yes, but I think you are referring to a full distribution of the after tax sub account. If a contribution is made and then rolled to a Roth IRA right away there will be no earnings, and the rollover will be tax free. Conversely, if you have had an after tax sub account for quite awhile and the earnings in it are 10%, you would request that the taxable amount (earnings) be rolled to a TIRA and the much larger non taxable amount (contributions) to a Roth. Another option if the earnings are only a few bucks is to simply roll the entire after tax sub account to your Roth, and pay taxes only the small amount of earnings. The key is to be sure that your plan is set up to include an after tax sub account. This is more common with larger employers.
Permalink Submitted by Peter Cool on Sat, 2014-11-29 00:54
Less than 59 ½ years old; 401K plan allows in-service withdrawal/rollover per below: Rollover Amount: $500kTaxable Amount: $300kNon-Taxable Amount: $200k Per IRS Notice 2014-54 I am directing 100% of the Taxable amount be disbursed to Rollover IRA account. I am directing 100% of the Nontaxable amount be disbursed to Roth IRA account. I want this transaction structured as a direct rollover or trustee-to-trustee transaction. My 401K Administrator is making this difficult they don’t want to distribute my funds to multiple accounts as allowed under 2014-54. They will support a direct rollover of 100% of the amount to either my Rollover IRA or my Roth IRA … they are reluctant to issue two checks and disburse the amounts to these two separate accounts. They seem to be slow in adopting 2014-54. They don’t care if I have the receiving end split the amounts into the two accounts; they seem bent on overly protecting themselves on this transaction; and making it difficult on everyone else. Can the 401K administrator restrict one in this fashion …. what are my options? 1) Go ahead and have them issue me one check made payable to the Financial Institution; and have the receiving Financial Institution split the amounts into the two accounts? I called two different Financial Institutions and they will readily support this. The 1099R should be correct … Direct rollover Code G. And I will receive two correct 5498 forms. The disbursement of the funds into the two accounts will be made at the same time and should be treated as a single distribution without regard to whether the recipient has directed that the disbursements be made to a single destination or multiple destinations. 2) Have the full Rollover Amount disbursed to me directly; minus the 20% tax withholding on the Taxable Amount. Use additional monies to make up the 20% and then perform two separate 60-day rollovers; performing the Rollover IRA transaction first then the Roth IRA transaction. File 2014 tax return and get the 20% refund.
Permalink Submitted by Peter Cool on Sat, 2014-11-29 01:01
Less than 59 ½ years old; 401K plan allows in-service withdrawal/rollover per below:
Per IRS Notice 2014-54 I am directing 100% of the Taxable amount be disbursed to Rollover IRA account. I am directing 100% of the Nontaxable amount be disbursed to Roth IRA account. I want this transaction structured as a direct rollover or trustee-to-trustee transaction. My 401K Administrator is making this difficult they don’t want to distribute my funds to multiple accounts as allowed under 2014-54. They will support a direct rollover of 100% of the amount to either my Rollover IRA or my Roth IRA … they are reluctant to issue two checks and disburse the amounts to these two separate accounts. They seem to be slow in adopting 2014-54. They don’t care if I have the receiving end split the amounts into the two accounts; they seem bent on overly protecting themselves on this transaction; and making it difficult on everyone else. Can the 401K administrator restrict one in this fashion …. what are my options? 1) Go ahead and have them issue me one check made payable to the Financial Institution; and have the receiving Financial Institution split the amounts into the two accounts? I called two different Financial Institutions and they will readily support this. The 1099R should be correct … Direct rollover Code G. And I will receive two correct 5498 forms. The disbursement of the funds into the two accounts will be made at the same time and should be treated as a single distribution without regard to whether the recipient has directed that the disbursements be made to a single destination or multiple destinations. 2) Have the full Rollover Amount disbursed to me directly; minus the 20% tax withholding on the Taxable Amount. Use additional monies to make up the 20% and then perform two separate 60-day rollovers; performing the Rollover IRA transaction first then the Roth IRA transaction. File 2014 tax return and get the 20% refund.
Permalink Submitted by Alan - IRA critic on Sat, 2014-11-29 01:07
Perhaps your plan will recognize and adopt Notice 2014-54 effective Jan 1. There is somewhat less risk to them by delaying to 2015. But if not, your Option 2, while not convenient is much safer because everything is in your control. You cannot be blindsided by a mis match between the 1099R and 5498 forms or by either the employer plan OR the IRA custodian. I don’t fully trust what the IRA custodians are indicating for Option 1, and would prefer to maintain control of the entire process despite the hassle of replacing the 20% withholding (60k) with your other funds. If you have the 60k I would take that route.
Permalink Submitted by Peter Cool on Sun, 2014-11-30 00:51
Alan, thanks for the reply .. I’m also leaning towards option #2 as being safer; but note I have written email correspondences from the IRA Custodians that they will split the amounts per my guidance … they seem willing to work with you given IRS notice 2014-54. Notice 2014-54 contains the following excerpt: “The commenters also pointed out that even under the allocation method described in Notice 2009-68 a participant who wishes to disburse after-tax amounts to one destination and pretax amounts to another could accomplish this result in a series of steps. First, the participant could take an eligible rollover distribution as a single cash distribution. Second, by taking advantage of the rule in §402(c)(2) that distribution amounts that are rolled over are treated as consisting first of pretax amounts, the participant could roll over the pretax amounts included in the distribution to one destination, such as a traditional IRA. The remaining amount of the distribution would be after-tax, which the participant could either roll over into a Roth IRA or retain without incurring any tax liability. The option to roll over all after-tax amounts into a Roth IRA, however, would only be available to taxpayers with sufficient funds available outside of the plan to be able to roll over the entire amount distributed, including the 20 percent of the taxable portion of the distribution paid to the IRS as withholding pursuant to § 3405(c).” I am interpreting this to mean nothing has changed in the IRS regulations; and I am safe to implement a transaction in this manner before the 2014 calendar year is over …. would you agree? Thanks!
Permalink Submitted by Alan - IRA critic on Sun, 2014-11-30 04:14
Yes. The single distribution method to the taxpayer has always permitted the taxpayer to complete their own rollovers in the appropriate order, and indicate the entire amount rolled over on line 16a and 16b of Form 1040 without a taxable amount. Withholding must be replaced. The recent Notice did not change this, only reinforced it, so you are now very secure in using this method.
Permalink Submitted by Peter Cool on Sun, 2014-11-30 05:33
Alan, thanks a lot for the replies much appreciated! This is my first time and only time I will be performing this transaction and it makes me very nervous. Just to be clear … I am not rolling over my total 401k monies just the amount my 401K plan allows me to rollover under it’s in-service withdrawal provision. The in-service withdrawal amount contains a proportionate amount of Taxable and Non-Taxable monies. I am assuming a In-service rollover distribution is still eligible for a single cash distribution; and that this transaction method is not limited to a total or complete rollover of my 401k assets. I am less than 59 1/2 and I am still working for this company; but I don’t believe this has any bearings on this transaction, since the plan provisions allow for In-service Withdrawals. As for my 1040 form … line 16a would be $500k (entire rollover amount); line 16b would be $0 (Taxable amount); and I would type ROLLOVER next to line 16a. Thanks a million!!!
Permalink Submitted by Alan - IRA critic on Sun, 2014-11-30 20:17
Yes, all assumptions correct. And of course, you will enter the withheld amount on p 2 of Form 1040 to get credit against your total tax liability. Only one 1099R to deal with.
Permalink Submitted by Doug Ruecker on Wed, 2015-03-25 20:56
In your comments to bedger above, you mention different treatment for pre-87 after tax funds. Please advise on the following situation:I am retired with remaining funds in 401k plan. I want to extract my after tax contributions into my Roth IRA for future tax free growth. The 401k plan breaks down my balance by different source funding.
What is the proper way to get the $21,447 in after tax funds into my outside Roth IRA or the plan’s 401k Roth?I don’t mine leaving funds with the 401k administrator – low cost and good options. Thanks
Permalink Submitted by Alan - IRA critic on Wed, 2015-03-25 21:47
You have several possible choices, but the plan may not offer in plan Roth rollovers yet, and before the year you reach 70.5 you would want to have the Roth 401k rolled to a Roth IRA to eliminate the RMDs that a Roth 401k requiries. If the plan does offer in plan Roth rollovers (IRRs), check if the plan provisions allow you to do an IRR of just the after tax balance (21,447) into the Roth 401k without rolling ANY pre tax amount with it, as that would create a big tax bill. Perhaps the plan allows this or perhaps not. But since you are retired, the plan MUST offer to do a direct rollover to an IRA. Most plans will follow Notice 2014-54 and allow you to order as a single request two direct rollovers, your pre tax balance to a TIRA and your after tax balance of 21,447 to a Roth IRA. These direct rollovers would be tax free. You would also request a direct rollover of the Roth 401k balance to your Roth IRA as well. Chances of attaining what you want here are better in an IRA rollover, but you can ask the plan if you can do an IRR of ONLY your after tax total into your Roth 401k if you would prefer to keep everything in the plan.