in-plan Roth rollovers

[Guest ebgroup]

When you look at how section 402A was amended by the Small Jobs Act to allow in-plan Roth rollovers, it seems that Congress amended the rollover section to include these conversions in the exemption from the 10% tax but forgot to amend the qualified distribution section to include the rollovers as a contribution for starting the 5 year clock. I see that the IRS is clear the plan must have a Roth provision to allow in-plan Roth rollovers, but presumably a participant does not have to have a designated roth account in order to take advantage of this new law, right? Has anyone seen or heard anything from the IRS on when the clock starts if a participant does a conversion and has never made a designated roth contribution?

[ETA Consulting LLC]

Has anyone seen or heard anything from the IRS on when the clock starts if a participant does a conversion and has never made a designated roth contribution?

The clock with start on January 1st of the year the conversion was made; that didn't require an amendment as the rule is already on the books. I do see what you're saying; but this would be implied since there is no other alternative. All rules for the qualified distribution period begin on the first day of the year in which the first contribution was made.

Good Luck!

[Guest ebgroup]

Has anyone seen or heard anything from the IRS on when the clock starts if a participant does a conversion and has never made a designated roth contribution?

The clock with start on January 1st of the year the conversion was made; that didn't require an amendment as the rule is already on the books. I do see what you're saying; but this would be implied since there is no other alternative. All rules for the qualified distribution period begin on the first day of the year in which the first contribution was made.

Good Luck!

I see a designated Roth contribution and rollover from a designated Roth account rule in Code Section 402A© (1) and (3), and a provision in ©(3)(B) that a rollover to a designated Roth is not a designated Roth contribution. Please point me to the rule you are referring to.

Thanks

[masteff]

See Q&A-12 here: http://www.irs.gov/pub/irs-drop/n-10-84.pdf

[Guest ebgroup]

See Q&A-12 here: http://www.irs.gov/pub/irs-drop/n-10-84.pdf

I see that, but isn't the 10% penalty under 72t different than the qualified distribution rule under 402A? I do not want to make any assumptions considering that the qualified distribution language under 408A is different than 402A and 72t applies to both. Do we have any authority for believing that the two five year rules have the same trigger?

[masteff]

I see that, but isn't the 10% penalty under 72t different than the qualified distribution rule under 402A? I do not want to make any assumptions considering that the qualified distribution language under 408A is different than 402A and 72t applies to both. Do we have any authority for believing that the two five year rules have the same trigger?

That Q&A gave the roadmap to your answer...

402A explicitly crossreferences part of 408A. 402A©(4)(D): "Other rules - The rules of subparagraphs (D), (E), and (F) of section 408A (d)(3) (as in effect for taxable years beginning after 2009) shall apply for purposes of this paragraph."

408A(d)(3)(F) specifically addresses the 5 year rule for rollovers. Thus, the same 5 year rule for rollovers to a Roth IRA count for rollovers to a designated Roth account.

And don't overconstrue the word "contribution". It's still a rollover contribution regardless of whether it's a "designated Roth contribution".

[Guest ebgroup]

I agree that the reference to contributions in 408A (d)(3)(F) is to rollover contributions ..."designated or not". And it may be that what you have articulated is the best argument we have. However, I must mention that the reference to 408A is "for purposes of this paragraph" (402A©(4)). The qualified distribution definition is in the next paragraph (402A(d)) which incorporates only 408A(d)(2)(A) and then instead of using the more general "contribution" language of the 5-year period of 408A(d)(2)(B) contains its own "5-taxable-year period". That 5-taxable year begins with a designated contribution or a rollover from another Roth account, nothing else.

I still think that applying a literal interpretation of all of this, if my only Roth contribution is an in-plan Roth contribution, in 5 years, I can take a distribution and not worry about the 10% penalty, but my accumulated earnings would be includible in gross income.

I can not find any IRS guidance or pending technical correction, addressing what I think is a drafting mistake. Are you agreeing with me that the statutory language is flawed and trying to assist me in coming up with a practical answer? Or do you think I am over interpreting all of this?

[masteff]

Ah, yes, it's a bit messy that the 5-year rule for in-plan rollovers is in © while designated Roth contributions and rollovers from other designated Roth accounts is in (d). I interpret that the impact is that in-plan rollovers have a 5 year period which runs separately from any 5 year period applying to designated Roth contributions and rollovers from other designated Roth accounts. The IRS provided guidance in the form of Notice 10-84, specifically Q&A-12. Q&A-12 is unambiguous that the in-plan rollover has a 5 year period beginning with the first day of the year of the rollover.

In-plan rollovers are still subject to the other provisions in 402A, such as the definition of a qualified distribution in (d)(2). You might read the model 402(f) language provided in Q&A-5 of Notice 10-84.

EDIT:

See the bottom of page 32 here: http://www.irs.gov/pub/irs-pdf/p575.pdf

EDIT 2:

Okay, I finally get your point. In 402A(d)(2)(B), an in-plan rollover does not start the separate 5 year clock for distributions from the designated Roth account. So if the only money a person had in their designated Roth account was an in-plan rollover, then any distribution would NOT be qualified.

Yes, I agree it might be a hole. Of course how many people are going to do an in-plan rollover and not make any designated Roth contributions?

[Belgarath]

What about Q&A-5 of the Notice 2010-84? Excerpt below. Seems to me that this provides support that the 5 year "clock" starts for the yearin which the rollover is made, or if earlier, when contributions were made to a designated roth account in a prior plan.

A qualified distribution from a designated Roth account is a payment made both after the distributee attains age 59½ (or after the distributee’s death or disability) and after the distributee has had a designated Roth account in the plan for a period of at least 5 years. The 5-year period described in the preceding sentence begins on January 1 of the year the distributee’s first contribution was made to the designated Roth account. However, if the distributee made a direct rollover to a designated Roth account in the plan from a designated Roth account in a plan of another employer, the 5-year period begins on January 1 of the year the distributee’s first contribution was made to the designated Roth account in the plan or, if earlier, to the designated Roth account in the plan of the other employer.

[masteff]

First, to be clear, we have two 5-year rules. The first applying to the rollover itself which starts from the year the rollover occurred. The second applies to when a "qualified distribution" occurs. The concern that ebgroup is raising is about the second (which is why it took me a bit to catch up with him).

Next we have to distinguish three terms: "designated Roth contribution", "a rollover from a designated Roth account" and "an in-plan Roth rollover".

It really depends on how to interpret 402A©(4)© which says in-plan rollovers "shall not be taken into account for purposes of paragraph (1)", which is the paragraph that defines "designated Roth contribution". Note that ©(3)(B) (relating to "rollovers from a designated Roth account") also points to paragraph (1), so the two references are consistent. In it's most literal form, they are saying that rollovers are not "designated Roth contributions".

In 402A(d)(2)(B) it says the 5-taxable-years for "qualified distributions" begins on the earlier of (i) first "designated Roth contribution" or (ii) the taxable year attributable to "a rollover contribution ... from a designated Roth account". If you read ©(4)© to mean the in-plan rollover is not a "designated Roth contribution", then you never trigger the 5-year rule (because you fail to meet either (d)(2)(B)(i) or (ii)).

As to Q&A-5, it's a question of whether the broader terminology of "distributee’s first contribution" is merely a weak interpretation of (d)(2)(B) or if it really suggests the Service holds that broader view that any contribution, including a rollover contribution, triggers the 5-year clock.

So how does anyone else interpret ©(4)©? And what is it's impact on (d)(2)(B)?

http://www.law.cornell.edu/uscode/usc_sec_...02---A000-.html