Pre-tax Thrift Disbursement

Submitted by Andrew Rogers on Fri, 2023-12-22 18:07

We were doing a rollover of a Thrift Plan to a traditional IRA. One the form, we filled out the portion for the traditional rollover but did not include any information for a roth as there was no indication on the form for a roth portion. Upon receiving the rollover, we discovered they’d split it into 2 portions.

One check was a rollover to the new custodian for the profit sharing. However, there was a second check. The original custodian of the thrift plan has disbursed some as apparently the contributions were pre-tax although no one involved had indicated. Additionally, they withheld 15% of the earnings on the post-tax contributions in the distribution. The employee was 65 at the time of distribution.

I have a few questions around this:

1) We cannot do a 60-day rollover since the disbursement and deposit would not match (it would be a difference of the taxes), correct?

2) If nothing is done and it’s just deposited, then there would normally be no taxes due, correct? If the contributions in the Thrift Plan were post-tax, then given the client’s age, they should have access to those portions tax-free if I understand correctly.



Submitted by Alan - IRA critic on Fri, 2023-12-22 19:27

  • It sounds like there was a post tax sub account including the earnings on the post tax contributions. Withholding came out of those pre tax earnings. 60 day rollovers can be done and if the client wishes to come up with the amount withheld using other funds, the entire pre tax amount can be rolled into the same TIRA as the direct rollover. The post tax amount can then be rolled into a Roth IRA or just retained outside of a retirement plan.
  • If this check is to be rolled over, the TIRA rollover should be done first, and the Roth second because a rollover of a distribution that contains both pre tax and post tax amounts is deemed to come first from the pre tax amounts. 
  • The withholding rate on the earnings for the post tax contributions should be the usual 20%. Perhaps the 15% rate was used because 75% of that distribution was pre tax and 20% of 75%= 15%. Before doing these rollovers distribution statements should be carefully reviewed to make sure it’s clear what gross amounts of pre tax earnings and post tax contributions were distributed, because a mistake with the rollover amounts will create a big problem. If the post tax sub account breakdown was only 25% post tax contributions and 75% gains, that would indicate that the post tax contributions were made several years ago to have gained 3 times the amount of the post tax contributions.
  • If done right, there will be no current taxes due and the amount that was withheld will be credited to the 2023 tax return. The post tax amount should go to a Roth IRA unless client needs the funds now and wants to keep them. 
  • Correct that due to client’s age, any pre tax amounts that are not rolled over will be taxable, but no penalty.

Submitted by Andrew Rogers on Fri, 2023-12-22 23:24

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Submitted by Andrew Rogers on Fri, 2023-12-22 23:33

Alright so a bit of a follow up with questions.  Pre-tax Funds were actually rolled over correctly and we have the check written correctly to the new custodian.  Post-tax funds are where we have the issue.  Let’s assume $100,000 total funds with $80,000 gains and $20,000 contribution.  They withhold the 20% of earnings of $16,000 and send the check to the client for $84,000.  Unfortunately we don’t know necessarily how they disbursed it as we’d requested the whole account rolled over but their statement didn’t differentiate the roth and traditional.  They just disbursed the pre-tax to the client.  In this case, I assume the 20% withholding is automatic on the earnings.  However at age 68, the client shouldn’t be due any taxes on the $100,000 disbursement, correct?  I’d assume if not, they would then get a credit for it on their returns for the $16,000.  If $100,000 was disbursed from roth funds and $84,000 went to the client, Would we need to deposit the FULL $100,000 in a Roth for the 60 day rollover, correct?  Our issue is that the funds were disbursed already for taxes so the client would need to come up with the $16,000.  Are we able to do a 60 day rollover on just the $84,000?  Essentially, would we be able t deposit the net amount, claim that $84,000 as a 60-day rollover, then get a credit on the taxes of the $16000? Sorry for all the questions.  It’s been a mess of a deal from the sending company due to their statements rather lacking of information.   I appologize for the single long paragraph.  For some reason, the reply won’t allow me to format it vertically on different lines.

Submitted by Alan - IRA critic on Sat, 2023-12-23 00:22

  • Just because some contributions were post tax, that does not mean they were designated Roth contributions. More likely, they were post tax non Roth contributions made several years ago into a separate after tax sub account in the pre tax 401k. Most likely that entire sub account was the source of the distribution check and included the post tax contributions and the gains on them as in your example. Client must determine if any of that account included a designated Roth balance or not. 
  • Further, withholding is only deducted from pre tax distributions, and a 60 day rollover must be done to avoid actual taxes on the gross pre tax distribution. What is unclear is whether the amount that generated the withholding was from gains on post tax non Roth contributions or gains on designated Roth contributions. Client needs to be sure or the rollovers might go to incorrect accounts which would be a disaster. My first post assumed that the distribution check did not include any Roth balance but the client needs to confirm that.
  • If the distribution was from a Roth account, then any rollover will have to go entirely to a Roth IRA to avoid taxes. The direct rollover instructions to the plan would normally have directed any Roth balance in the plan to a Roth IRA, not as a distribution to the taxpayer. That is why I suspected that the distribution was from a non Roth after tax sub account that contained earnings rather than any Roth balance.
  • If client made any Roth 401k contributions the plan statements and the W-2 for the year would show these contributions as Roth. Client should do no rollovers at all until the source account for these dollars is clarified.

Submitted by Andrew Rogers on Tue, 2023-12-26 15:17

Alright so that last set of info got me somwhere to a degree.  From what we understand from the company that distributed it, the there was a postion that was in some type of post-tax sub account that was NOT put into a separate bucket on the statement.  Therefore, the assumption was that all the funds were traditional.  When they got the rollover request, their procedure is that if the client has post-tax funds and no Roth account is listed on the transfer paperwork, then they just disburse it to the client.  I have confirmed as well that the withholding was 20% on the gains within the post-tax bucket of the account.  So in this case, let’s say the client was distributed $100,000 with $15,000 withheld for taxes and $85,000 distributed to the client.  In my understanding, we need to determine if the $100,000 was Roth-eligible.  If is is Roth eligible, are we able to do a deposit of the $85,000 as an indirect rollover or MUST it have the $15,000 added to do it for $100,000 total?  If it’s in fact NOT Roth eligible, are we able to roll the $75,000 in gains into a Roth since the gains were not taxable in the first place?  Additionally if nothing is done, I’d assume the $15,000 in taxes would become a credit if it’s a Roth account and not a credit (actually due) if it’s not Roth-eligible.

Submitted by Alan - IRA critic on Tue, 2023-12-26 16:41

  • The distributed amount is eligible to be rolled over into either a traditional IRA or a Roth IRA, but the only transaction that makes sense is to do a split 60 day rollover and replacing the withheld amount with other money. As indicated earlier, the portion to be rolled over to the traditional must be done first and the Roth rollover must be done last. Therefore, 75,000 should be rolled over to a TIRA which includes replacement of the 15,000 withheld, then the remaining 25,000 should be rolled to a Roth IRA. There will be no taxes due and the withholding will be credited to the tax liability for 2023. That 75,000 going to the traditional can go into the same rollover IRA that received the direct rollover.
  • Of course, if a larger Roth rollover is desired, a lower amount could be rolled to the TIRA and the Roth rollover increased, but the amount added to Roth from pre tax money would be taxable income. The only reason for amounts NOT being rollover eligible (to either TIRA or Roth IRA) would be if there was an RMD for the plan that was not completed before the distribution. The amount of said RMD would not be eligible for rollover. 
  • If the 15000 of withholding is to be replaced, it should be part of the 75,000 rolled to the TIRA.
  • Separate 1099R forms will be issued for the direct rollover and for the distribution. 
  • If the 15,000 withheld could NOT be replaced with other funds, then only 60,000 would be rolled to the TIRA (leaving 15,000 taxable), and 25,000 to the Roth IRA, or if no tax due was desired, 75,000 to the TIRA and 10,000 to the Roth IRA. 

Submitted by Andrew Rogers on Tue, 2023-12-26 17:10

There was already a TIRA rollover done.  So there is another component.  Let’s assume the original account was actually for $300,000. $200,000 was done correctly as a TIRA Rollover.  The additional $100,000 is employee contributions and earnings on it (of which they withheld 20%).  If the check was distributed for them of $85,000, can we not deposit $75,000 as an actual indirect rollover and the $25,000 would be just a withdrawal of the post-tax amount contributed?  Am I reading right that it would be available to be traditional or Roth either one?

Submitted by Alan - IRA critic on Tue, 2023-12-26 17:26

Yes, there is an unlimited number of ways this can be split up, depending on how much will go to the TIRA, how much to the Roth IRA, and how much will be kept (not rolled over). Any amount going to the Roth in excess of 25000 will be taxable. For example, because 15000 was withheld, if taxes were to be avoided, then 15000 of the cash received could be used to replace the withholding and 75,000 rolled to the TIRA. That would leave 10,000 left in cash until the tax return was filed and if the withholding resulted in a refund of 15,000, eventually the cash available would be back to 25,000. Of course, a Roth IRA generates tax free gains, so unless the cash will be needed for spending in the near future, a Roth rollover would be preferable. Note that if after tax money is rolled to a Roth IRA, that amount can be distributed from the Roth IRA anytime without tax or penalty. 

Submitted by Andrew Rogers on Tue, 2023-12-26 17:56

So I think that rounds it out and I appreciate the help.  Here’s my understanding and what’s probably the best plan of attack… Roll the $200,000 into the TIRA.  Then split deposit the check as $75,000 into the TIRA and the remaining $10,000 into an individual non-retirement account.  I’d then claim the $75,000 as an indirect rollover and the client would then not have any tax liability once complete and get a credit for the $15,000 already paid.

Submitted by Alan - IRA critic on Tue, 2023-12-26 18:17

OK – except that the total gross distribution in this example was 100k, not 200k. 

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