Taxation of After Tax Distributions

[Guest LKeener]

Is there a reg that states that pre 87 contributions must be taken out first? Participant has a large balance of which a small portion around 10k is pre 87 after tax. Participant wants to distribute only part of his total balance (which is allowed under plan terms) and that the partial distribution be only pre-tax money. Record keeper is stating that they can't process the request because the rules state that pre87 money has to come out first and that since the participant has pre87 that he must distribute that amount even if he wants only pre tax money. What rule is this? The plan document is silent on this issue and this is the first time such a request has ever come through. Other participants with pre87 money elect to just take a total distribution.

Client has 95K - 25 after tax dollars and the balance earnings. Client has terminated. Wants to take the after-tax amount and roll the pre-tax earnings to new employer, as new plan doesn't accept after tax dollars. Expert is stating part of the earnings must be distributed and taxed if the after tax dollars are being distributed - approximately 31%. I am unable to find the site that confirms this. Please, if you know, share. PS it isn't in the instructions book....Thank you!

[Kimberly S]

Is this truly a partial distribution -- or a total distriabution that is only partially rolled over? I think the reg you're looking for is taking about someone taking a partial distribution.

[Guest LKeener]

Is this truly a partial distribution -- or a total distriabution that is only partially rolled over? I think the reg you're looking for is taking about someone taking a partial distribution.

This is a partial distribution. The plan terminated, the client wants to take only his after tax money out and transfer the balance to the new employer plan

[masteff]

Expert is stating part of the earnings must be distributed and taxed if the after tax dollars are being distributed - approximately 31%.

Expert would be correct EXCEPT Code Section 402©(2) states that a rollover comes first from the taxable portion and then from the nontaxable portion. So... the earnings can be rolled over in full.

the amount transferred shall be treated as consisting first of the portion of such distribution that is includible in gross income

[Bird]

This is a partial distribution. The plan terminated, the client wants to take only his after tax money out and transfer the balance to the new employer plan

I believe you've described a total distribution, unless the transfer is something that's going to happen without the participant's consent, as in a merger.

No matter, you can generally take out pre-87 after-tax contributions on a FIFO basis. IRS Pub 575 might help; here's the link (scroll down for Pubs).

EP Forms/Publications/Products

See page 16.

[Appleby]

This is a partial distribution. The plan terminated, the client wants to take only his after tax money out and transfer the balance to the new employer plan

I agree with Bird.

You want to drop the ‘partial’, as it may only confuse those involved.

The participant can submit a withdrawal request for the total balance, and include instructions to :

a) Send the pre-tax amount to the new employer-plan

b) Send him a check for the after-tax amount.

This will provide the desired results.

[Guest LKeener]

This is a partial distribution. The plan terminated, the client wants to take only his after tax money out and transfer the balance to the new employer plan

I agree with Bird.

You want to drop the ‘partial’, as it may only confuse those involved.

The participant can submit a withdrawal request for the total balance, and include instructions to :

a) Send the pre-tax amount to the new employer-plan

b) Send him a check for the after-tax amount.

This will provide the desired results.

The money is post 86 rather than pre. Does this make a difference?

[Mike Preston]

No.

Remember, you originally posted on the theory that you were dealing with an instruction to distribute only partially. In fact, as has been pointed out, this is a complete distribution from the plan. You are only using the word "partial" to refer to the fact that some of the distribution is going one place and the balance is going another.

In such a case, the Code is clear. Roll all the taxable.

However, had you been speaking about a true "partial" distribution from a plan, then you would look to 87-13 or 87-16 (I always get them confused until I look them up... be my guest) to see what the rules should be with respect to withdrawing *some* of one's account. What I think it said, is that a plan had to decide whether to follow current law (a partial distribution is made on a pro-rata basis between tax and after-tax) or whether it could follow pre-existing law (all from the non-taxable pot until it is empty). Once the *plan* decided, then *all* subsequent distributions had to be treated the same. But, to reiterate, this is all gibberish to you, because you aren't asking for a partial distribution at all.