Client can make a $4,000 after tax contribution to their work retirement plan. They are allowed to withdraw their after-tax contribution at any time. If the account grows to $4,200, can they withdraw the entire $4,200 to a Roth IRA? Or, can they only convert $4,000 to a Roth IRA and $200 would go to a Trad IRA? Or, would they have to leave the $200 at their work retirement plan?
The preference would be to do a direct rollover of the entire subaccount ($4,200 in this example). The client has no other Roth IRA, but does have a 1M trad IRA. Is the entire $4,200 free from taxation when they do the rollover?I thought I read somewhere that the earnings will be taxed.
Yes, taxes would be owed on the gains, but 200 is a very small taxable amount. Further, plans are not required to offer direct rollovers in amounts of 500 or less, so it is possible that the plan would not split the rollover between IRAs. There have also been cases where the respective amounts are deposited in the wrong IRA account which creates a major hassle in getting corrected. Client can still request a split direct rollover per Notice 2014-54, but it may be better to opt for the simplicity of rolling all 4200 to a Roth IRA.
If they roll all $4,200 to the Roth IRA, will they have to worry about the prorata rules, since the client has a large IRA already in place?
No. The funds would be going direct from a qualified plan to the Roth IRA. Since they are never deposited into a traditional IRA the traditional IRA balance is not a factor. Only 200 will be taxable.
Permalink Submitted by Alan - IRA critic on Sat, 2019-11-23 00:41
They must distribute the gains pro rata with the contributions. For only $200 of gains, I would recommend doing a direct rollover of the entire sub account balance (4,200) to a Roth IRA, and avoid splitting out the 200 to a TIRA account. Leaving only the 200 behind is not an option.