After Tax Rollover

[Guest elang]

Question regarding a participant who has After-Tax money in their Profit Sharing Plan:

A participant is retiring and rolling their balance into an IRA. If for example over the years they have contributed $100,000 of after-tax dollars and now there is a balance of $500,000 in their after-tax account ($400,000 in earnings); can the participant take the $100,000 of after-tax money as a distribution and roll the $400,000 of earnings into the IRA?

Thanks in advance for your help.

[GMK]

After-tax dollars contributed before 1987 can be taken separately and are not taxed. Earnings on those pre-1987 contributions can be rolled separately (and taxed later when they're taken out of the IRA).

For contributions after 1986, distributions are a proportional mix of after-tax (contributions) and pre-tax (earnings), so you can't split them up. And check that whoever gets this part of the rollover will accept and separately account for the after-tax portion, so the participant isn't taxed again on the after-tax portion.

[Guest elang]

Thank You

[ESOP Guy]

This answer needs to be double check. I only had one client in the after 2001 with after-tax money in the plan. When they started allowing after-tax to be rolled into IRA’s I thought they changed the rule for rollovers. I suggest you read 402©(2).

Here is the section quoted below:

(2) Maximum amount which may be rolled over

In the case of any eligible rollover distribution, the maximum amount transferred to which paragraph (1) applies shall not exceed the portion of such distribution which is includible in gross income (determined without regard to paragraph (1)). The preceding sentence shall not apply to such distribution to the extent—

(A) such portion is transferred in a direct trustee-to-trustee transfer to a qualified trust or to an annuity contract described in section 403 (b) and such trust or contract provides for separate accounting for amounts so transferred (and earnings thereon), including separately accounting for the portion of such distribution which is includible in gross income and the portion of such distribution which is not so includible, or

(B) such portion is transferred to an eligible retirement plan described in clause (i) or (ii) of paragraph (8)(B).

In the case of a transfer described in subparagraph (A) or (B), the amount transferred shall be treated as consisting first of the portion of such distribution that is includible in gross income (determined without regard to paragraph (1)). I believe the highlighted portion says you treat the taxable portion as going into the IRA first.

But given my limited experience I am willing to say double check me.

[GMK]

ESOP guy is correct. I was focusing on the pre-'87 part.

See post #7 in this thread:

http://benefitslink.com/boards/index.php?showtopic=44078

[mbozek]

Question regarding a participant who has After-Tax money in their Profit Sharing Plan:

A participant is retiring and rolling their balance into an IRA. If for example over the years they have contributed $100,000 of after-tax dollars and now there is a balance of $500,000 in their after-tax account ($400,000 in earnings); can the participant take the $100,000 of after-tax money as a distribution and roll the $400,000 of earnings into the IRA?

Thanks in advance for your help.

There are at lest 4 ways to retain the post 86 AT funds received as part of a distribution without paying any tax on the pre tax funds.

1. If the plan permits, make a direct rollover of all pre tax funds to an IRA. Under IRC 402©(2) the first distribution is deemed to be from pre tax amounts. See Pub 575, P 26. At a later time, such as the next year withdraw the AT funds.

2. If the plan permits, receive a distribution of the AT funds and attributable earnings. Under IRC 72(d)(2) this distribution is permitted to be rolled over because it is a separate contract. Only the pre tax earnings will be subject to the 20% withholding tax which can be paid from the AT amount and the amount withheld can be recovered by lowering W-2 withholding or a refund when the tax return is filed.

3. If 1 or 2 are not available receive a distribution of the pre tax and AT funds and pay the 20% witholding tax on the pre tax amount. As long as the pre tax funds and an amount equal to the taxes withheld are rolled over to an IRA within 60 days of the distribution, the entire AT amount can be retained. See Notice 2009-68. The amount withheld can be recovered when the tax return is filed.

4. Elect a direct rollover to an IRA of both pre and AT amounts and then later in the year roll the pre tax funds to another Qual plan. In the following year the AT funds can be removed from the IRA without tax and any earnings can be rolled over to an IRA if there are no other traditional IRAs subject to the Pro rata rule.

All of the above options are complicated and require the assistance of a tax advisor and a review of the plan provisions with the plan admin.