IRA Direct Transfer with Basis
A client has an old pension account that can be transferred into an IRA at sep from service. THe pension account has after tax/cost basis. The goal is to withdraw the cost basis and only transfer the pre-tax amount to an IRA. the existing vendor doesn’t seem to understand how to distribute the cost basis and transfer the pre-tax amount. The client could transfer the entire amount to the IRA vendor and withdraw the after tax amount , in order to keep the IRA only pre-tax. An alternative is to do a rollover, taking receipt of the entire amount, and then writing a check for the pre-tax amount only , within 60 days to the IRA.
When the 1099 is generated i assume it should have taxable amount and tax free amount?
Which approach do you think is the most accurate to achieve a 100% pre-tax IRA.
thank you
Permalink Submitted by Alan - IRA critic on Tue, 2024-09-17 10:49
The plan should know how to execute a split rollover per Notice 2014-54, with the pre tax balance going to a traditional IRA and the after tax basis going to a Roth IRA. That should produce two separate checks probably mailed to client, one payable to TIRA FBO client and the other to Roth IRA FBO client. The client would then check to make sure the amounts are correct and if so, forward them to the TIRA and Roth IRA custodians.
A single distribution check payable to the client would require that 20% of the pre tax amount go to federal withholding. Client would then have to come up with the withholding amount to complete 60 day rollovers with their own checks, first to the TIRA and then to the Roth IRA. The 1099R for this will show the taxable amount in Box 2a and the after tax basis in Box 5, and also the withholding in Box 4.
The direct rollovers are easier and more efficient, so an actual distribution should also be used if the plan is not up to speed or if the client wishes to keep the AT amount rather than having it go to a Roth IRA.