Rollover from QP to Roth IRA

[pmacduff]

I have my first participant request to roll 100% of her Plan balance into her Roth IRA account where her plan balance contains both pre-tax and roth monies. The plan is with one of the bigger 401k vendors, but I don't see the option for me to code the pre-tax portion as a rollover to the participant's Roth IRA. I have emailed the vendor for instruction, but wonder what others are doing.

Also - I found the info in Pub 590 regarding rolling from a qualified plan to a roth IRA somewhat confusing. Does the 20% mandatory Federal w/h still apply to the pretax portion?

any assistance appreciated.

[Guest naveen]

On a side note, take a look at Notice 2009-68

IRS_Notice_2009_68.pdf

[pmacduff]

Thanks - I read through that as well. From what I have read the mandatory withholding does not apply, but the 1099-R will show the taxable amount of the pretax rollover to the Roth IRA. That makes sense to me, however the vendor I'm questioning doesn't have any special coding to know that it is rolling to a Roth IRA. The website uses code G if I code it as a rollover. I'm trying to find out from them how they would know it was rolling to a Roth IRA and therefore need to include the pretax as taxable on the 1099-R reporting.

[Bird]

the vendor I'm questioning doesn't have any special coding to know that it is rolling to a Roth IRA

Mmm, how hard are they trying? It's in the 1099-R instructions, Code H.

[pmacduff]

sorry bird - Code "H" is a roll from a Roth account to a Roth IRA. This is regular pretax (deferrals, profit share, match) rolling from the QP to the Roth IRA.

[masteff]

Going back to Notice 09-68... At the bottom of page 3 it explains that "PPA '06 amended the definition of qualified rollover contribution in Sec 408A of the Code to include rollover contributions from any eligible retirement plan as defined in Sec 402©((8)(B)". The money had to first be a rollover contribution per the QP-relevant sections. If it in fact qualifies as a direct rollover, then it's still such, even if it's going to a Roth IRA. Congress and the IRS do not appear to have included "from QP to Roth IRA" in the requirements for 20% mandatory withholding (and further note that the new model notice in 09-68 does not specify any special difference for withholding on "QP to Roth IRA" direct rollovers).

[pmacduff]

Yes - I'm ok with the 20% withholding not applying and this being considered as a direct rollover and therefore code "G".

My main concern is that the vendor will issue a 1099-R form with a code "G" but yet has no way to know that the rollover is going to a roth IRA (as opposed to a traditional IRA) and will not include the proper taxable amount in 2a. I heard from the vendor earlier today and they are "going to call me back" as they didn't have a ready answer!

[Bird]

OK, I take back my snotty remark.

I think you just put in the taxable amount in 2a. Please report back on what the vendor says.

Notice 2009-75 might help; it doesn't tell you how to complete the form but Q&A 1 talks about how much is included in taxable income, so it seems logical that you complete the form with Code G and indicate that it is taxable (of course you might, or probably, need two 1099-Rs).

[pmacduff]

ok - finally heard from the vendor. They cannot process this on their automatic withdrawal system so I had to send them in a "hard copy" detailed withdrawal request. They agreed with me that the 1099-R will have the gross distribution amount in box 1, taxable amount in 2a (which will basically be the total of her pretax accounts including profit share, 401(k) and match) and a "G" in Box 7.

This participant did have a roth account as well. That could be processed on the automatic system to roll to the Roth IRA. They told me that she will receive 2 1099-R forms, one as indicated above and one for the roth portion. The roth 1099-R will be coded "BG" - Roth Direct Rollover/Rollover contribution.

We are a small shop and I told someone else in the office I was amazed that this had not come up before esp. since it is one of the bigger vendors. I know there may not be many participants who would roll EVERYTHING into a Roth; including pretax, but I'm thinking it would have come up at least once in the first 9 months of the year!! Hope there aren't any 1099-R forms out there with a code "G" that rolled pretax to a Roth IRA and have no taxable amount in box 2a...Uncle Sam would be upset!!!

Thanks all for your input.

[masteff]

On the topic of codes and box 2a... also see the recent discussion in this thread: http://benefitslink.com/boards/index.php?s...c=43334&hl=

[pmacduff]

masteff - thank you for the link - I should have reviewed that one but I seem to really have an issue when I try and search the boards for topics!!

[Guest cmp1454]

ok - finally heard from the vendor. They cannot process this on their automatic withdrawal system so I had to send them in a "hard copy" detailed withdrawal request. They agreed with me that the 1099-R will have the gross distribution amount in box 1, taxable amount in 2a (which will basically be the total of her pretax accounts including profit share, 401(k) and match) and a "G" in Box 7.

This participant did have a roth account as well. That could be processed on the automatic system to roll to the Roth IRA. They told me that she will receive 2 1099-R forms, one as indicated above and one for the roth portion. The roth 1099-R will be coded "BG" - Roth Direct Rollover/Rollover contribution.

We are a small shop and I told someone else in the office I was amazed that this had not come up before esp. since it is one of the bigger vendors. I know there may not be many participants who would roll EVERYTHING into a Roth; including pretax, but I'm thinking it would have come up at least once in the first 9 months of the year!! Hope there aren't any 1099-R forms out there with a code "G" that rolled pretax to a Roth IRA and have no taxable amount in box 2a...Uncle Sam would be upset!!!

Thanks all for your input.

If this is going to a Roth IRA, the Roth portion is a code H, not BG --BG is used when Roth is rolled to another eligible employer plan. The pre-tax portion is a code G and assuming no after-tax involved, the entire amount is reported as taxable in 2a.

[pmacduff]

you are correct cmp1454, the vendor did not let me choose the "H" code on the automated system, the only option was the "BG" Code. I have brought this up to them!!!!

[billfgrady]

Is it possible then for a 401(k) plan participant to roll after-tax contributions to a Roth IRA and pre-tax contributions to a traditional IRA?

[pmacduff]

All of our vendors allow roth contributions to roll to roth IRA and pre-tax to roll to traditional IRA, in fact that is actually the norm for most participants I see.

I don't know about the options for any other "after-tax" dollars in a Qualified Plan as none of our plans allow the after-tax contributions (besides roth). I'm told that was allowable in the "old days" but eliminated from many plans as the after tax dollars had to be tested in the acp testing.

others?

[K2retire]

I always thought the old non-Roth after tax amounts were not allowed to roll over to an IRA, but I had a call from a plan sponsor today challenging that.

[pmacduff]

K2retire - I just looked in Publication 590 - (see page 26), it looks like you can roll those monies now. I know what you mean, though, my Mother retired about 7 years ago and the after tax amounts in her 401(k) Plan were distributed to her. She rolled everything else over. She didn't have an option at the time, either but had to take the after tax $$.

[Appleby]

k2 and pmac, this was available as of 01/01/02, under EGTRRA