Plan Rollover Conversions After

Transcription

1 Plan Rollover Conversions After Mid-Air Conversions with After-tax QP Contributions Christine G. Russell, QPA, QKA, AIF, RMA Director of Training and Education PenServ Plan Services, Inc. Full Service Employee Benefit and Retirement Plan Consultants 12/3/2014 PenServ Plan Services,

2 Agenda What s New? Definitions Rollovers Employer Plan Money Types Designated Roth Accounts After-Tax Contributions vs. Designated Roth Designated Roth to Roth IRA Rollover Conversions (QRC s) Employee After-Tax & Current Rules New Rules for Rollover Conversions (QRC s) Beneficiary QRC s Summary & Questions PenServ Plan Services,

3 What s New? IRS Notice Effective date: OR Transitional Rule: Impacts: Employer Plan TPA s & Recordkeepers Taxpayers taking distributions with After-Tax balances Advisors who assist these taxpayers PenServ Plan Services,

4 Removal and Change to Allocation Rule for Certain Rollovers Notice issued Applies to Employer Plan Rollovers to Traditional IRA and Roth IRA. Impacts Taxable Amount of Rollover/Conversion for After-tax distributions. Allows taxpayer to cherry pick After-tax for distribution or conversion to Roth IRA. Rule Change NOT correction. PenServ Plan Services,

5 Definitions 60 Day Rollover: Where an actual distribution is made to the participant and has 60 days to roll over (redeposit) into another plan. Direct Rollover: Where one retirement account is paid directly into another retirement account. PenServ Plan Services,

6 Definitions Qualified Rollover Contributions (QRCs) from an employer s plan to a Roth IRA gaining popularity due to elimination of conversion eligibility rules. Sometimes called Mid-Air conversions. May be a taxable conversion! Employer Plan Roth IRA PenServ Plan Services,

7 Employer Plan Money Sources Pre-tax elective deferrals Employer Match Profit Sharing Rollovers from other plans After-tax employee contributions Roth elective deferrals (Designated Roth Account DRA ) PenServ Plan Services,

8 DRA Vs. Employee After-tax Both are funded with after-tax dollars. Employee After-tax contributions are not the same as Designated Roth contributions. Actual amount of After-tax contribution is BASIS. Employee After-tax earnings are tax deferred only. DRA Qualified distributions are tax-free. PenServ Plan Services,

9 Designated Roth Accounts (DRA) Designated Roth Accounts are funded with after-tax dollars. Qualified distributions are tax-free; penaltyfree. To be a qualified distribution, must be made after 5-year aging period and be due to 59½, death, or disability. PenServ Plan Services,

10 Rolling Red DRA Money to Roth IRA May be Direct Rolled ( H ) or 60 Day Rolled ( B ). Not a taxable event! ER Plan DRA Roth IRA PenServ Plan Services,

11 Employer Plan Money Sources Pre-tax elective deferrals Employer Match Profit Sharing Rollovers from other plans After-tax employee contributions Roth Deferrals (Designated Roth Account DRA ) PenServ Plan Services,

12 Employer Plan Money Sources Pre-tax elective deferrals Employer Match Profit Sharing Rollovers from other plans After-tax employee contributions ( BASIS ) Example: 250,000 total blue balance - 50,000 after-tax $200,000 taxable PenServ Plan Services,

13 Qualified Rollover Contributions (QRCs) BLUE Money to a Roth IRA Employer Plan Roth IRA PenServ Plan Services,

14 QRC = Rollover Conversions Taxable amount included in income. Taxable amount of conversion is treated as distributed the year when the distribution came from the employer s plan. (Notice ) PenServ Plan Services,

15 QRC = Rollover Conversions Effective in 2008, employer plans are required to offer an eligible rollover distribution to be converted as a direct rollover into a Roth IRA. Participant could also do a 60-day rollover conversion to a Roth IRA. PenServ Plan Services,

16 Conversions after 2007 Blue Money Form 1099-R All taxable (except after-tax) Roth IRA Form 5498, Box 2 Blue Money 1099-R Traditional IRA R Box 2 All taxable Roth IRA Form 5498, Box 3 PenServ Plan Services,

17 QRC s & After-Tax Contributions After-tax employee contributions may be rolled over or directly rolled over to a Traditional IRA - Taxpayer must keep own records Form QRCs (to Roth IRA) may contain after-tax employee contributions (BASIS). Employer Plan Roth IRA PenServ Plan Services,

18 Current Rules (Pre-2015) QRC s from Employer Sponsored Plans PenServ Plan Services,

19 Kinds of After-Tax Money & Pre-2015 Basis Recovery Pre-1987 Employee After-Tax Contributions Grandfathered rule IRS Notice 87-13, A-15 Post-1986 Employee After-Tax Contributions [Other than held in a Separate Contract 72(d)(2)] PRO RATA BASIS RECOVERY: If employee rolls over a plan distribution that consists of both pre-tax and after-tax amounts then the following formulas must be used to determine the taxable and nontaxable amounts: (Spring 2010/Volume 10 of IRS Employee Plans News, Page 4) PenServ Plan Services,

20 Pro Rata Basis Recovery Nontaxable amount = after-tax contributions X amount distributed value of your plan account(s) Taxable amount = amount distributed nontaxable amount In applying these formulas, remember: 1. do not include any designated Roth accounts; 2. value is the total of the plan account(s) at the time of the distribution but does not include the value of any of the plan s designated Roth account(s); and 3. amount distributed is the amount distributed and rolled over to a Roth IRA or directly rolled over from the plan to a Roth IRA. PenServ Plan Services,

21 Pre-2015 After-Tax Contributions IRS Notice clarified that After-tax employee contributions (BASIS) rolled over to traditional IRA: Could not be withdrawn or converted to Roth - basis first. And that Pro rata basis recovery taxation applies to distributions or QRC s. Exception was Pre-87 After-tax balance (if tracked). PenServ Plan Services,

22 IRS Notice Example Pre-tax elective deferrals Employer Match Profit Sharing Rollovers from other plans After-tax employee contributions ( BASIS ) Example: 250,000 total blue balance - 50,000 after-tax $200,000 taxable PenServ Plan Services,

23 IRS Notice Example BEFORE (Current Rule) = Pro-Rata Basis Recovery 401k = $250,000 Balance $200,000 Pre-Tax $50,000 After-Tax Direct Roll = $200,000 to IRA $160,000 Pre-Tax $40,000 After-Tax Cash/QRC = $50,000 $40,000 Pre-Tax $10,000 After-Tax PenServ Plan Services,

24 New Rules ( ) QRC s from Employer Sponsored Plans PenServ Plan Services,

25 Removal and Change to Allocation Rule for Certain Rollovers Effective , IF 401k record/keeper separately tracks pre-tax and after-tax sources, then employee may roll just pre-tax. 401k = $65,000 Balance $50,000 Pre-Tax $15,000 After-Tax $10,000 Basis $5,000 Earnings Direct Roll = $50,000 to IRA (Pre-Tax Acct.) Cash = $14,000 ($1,000 withholding on earnings) PenServ Plan Services,

26 January 1, 2015 Can do even better! 401k = $65,000 Balance $50,000 Pre-Tax $15,000 After-Tax $10,000 Basis $5,000 Earnings Direct Roll = $55,000 to IRA (All Pre-Tax) Cash/QRC = $10,000 Tax Implication? None! PenServ Plan Services,

27 Removal and Change to Allocation Rule for Certain Rollovers For , record/keeper must update forms and issue multiple checks. Danger: Taxpayer must designate actual dollar amounts to be rolled or distributed. Distribution specifying 100% of pre-tax not sufficient. Many companies indicate a % distribution for rollovers to IRAs. This will no longer work! Distribution forms must be amended. PenServ Plan Services,

28 Removal and Change to Allocation Rule for Certain Rollovers Rules for Partial Distributions Pro-Rata based on proportion of after-tax and pre-tax in account. Ex. can t just distribute pre-tax from 401k. $100,000 in account $90,000 taxable & $10,000 basis Partial distribution or QRC would be 90% taxable. A $10,000 distribution = $9000 taxable + $1000 Basis PenServ Plan Services,

29 Removal and Change to Allocation Rule for Certain Rollovers Transitional Rule Effective September 18, 2014 Taxpayer may use new rules, IF TPA/ recordkeeper: Has updated distribution forms, Keeps track of sources, and Allows multiple distributions. o If TPA/recordkeeper does not permit multiple rollover distributions, the participant may be forced to request a distribution and complete a 60 day rollover, after 20% is withheld. PenServ Plan Services,

30 402(f) Notice IRS released updated 402(f) notice on 11/24/2014 reflecting this allocation change. They did not correct other errors, part of the notice previously. Check with your legal or forms provider. Employee must have at least 30 days to decide between distribution and direct rollover. $100 penalty for each failure to provide notice. PenServ Plan Services,

31 QRC s by a Beneficiary Employer Plan Roth IRA PenServ Plan Services,

32 QRCs by a Beneficiary QRCs can be done by a beneficiary. Spouse beneficiary rules are different than non-spouse beneficiary rules. Prior to 2010, conversion QRC eligibility was based on AGI and filing status of the beneficiary. PenServ Plan Services,

33 QRCs by a Beneficiary Non-spouse Beneficiary Direct Rollovers are required to be offered by all employer plans. Failure to offer a direct rollover choice to a nonspouse beneficiary could jeopardize the qualified status of the plan! Actual distributions to non-spouse beneficiaries are subject to the 20% mandatory withholding, because the non- spouse beneficiary could have elected the direct rollover! However, once distributed, no 60-day rollover!! PenServ Plan Services,

34 Summary PenServ Plan Services,

35 What we learned Roth elective deferrals and after-tax employee contributions are different. In general prior to 2015, a taxpayer with after-tax employee contributions must use pro rata basis recovery to determine their taxable amount when doing a distribution and/or QRC (conversion to Roth IRA). Post 2014, taxpayers taking a complete distribution will be able to convert - or take in cash - just their after-tax account balance to limit their tax burden. PenServ Plan Services,

36 YOUR QUESTIONS? Christine G. Russell, QPA, QKA, AIF, RMA Director of Training and Education Main phone (215) PenServ Plan Services, Inc. provides training, newsletters, a technical hotline service, plan documents, consulting and many other services for financial services firms and advisors. PenServ Plan Services,