Distribution of Pre-1987 After-Tax Contribution

[GMK]

Am I missing anything in the following?

DC plan (ESOP) previously allowed employee after-tax contributions to individual accounts with tax-deferred earnings. These accounts are part of the ESOP assets, but they are not invested in any securities of the plan sponsor.

Participant contributed $8,000 (after-tax) in 1986. No after-tax contributions since then.

When participant receives distribution of the account (now worth say, $22,000), participant can take the original $8,000 in cash tax free and roll over the earnings ($14,000) to an IRA (or take the earnings in cash and pay tax on that amount).

Because the after-tax portion was contributed before 1987, it can be taken out separately, and the pro rata recovery rules (distributon = some contribution plus some earnings) for distributions of after-tax contributions made after 1986 do not apply to the $8,000.

And it doesn't hurt that there would be no RMD for 2009.

Participant would like to do this, and I would like to be sure we aren't missing something.

All comments are appreciated. Thanks.

[Bird]

I agree, although I don't understand the comment about it being good that RMDs aren't required...unless you just meant that that's one less thing to complicate it.

[GMK]

Thank you, Bird.

Yes the RMD comment was, as you surmised, only regarding one less thing in the process.