Roth Distribution - Fees and Roth Basis

[Vlad401k]

Let's say a participant has $1,000 Roth basis in the plan. The assets subsequently appreciate to $2,000, so there is $1,000 gain that's taxable (the distribution is not qualified). Let's say the TPA firm charges $50 to process the distribution. How would that $50 affect the gain? I see 2 possible scenarios:

1) The distribution fee of $50 reduces gain by $50 and the total gain is $950, which is also the taxable amount.

2) The distribution fee applies proportionately to the basis and to the gain. One half ($25) of the fee applies to Roth basis and the other half (also $25) applies to the gain. The gain is thereby reduced to $975.

Which of these approaches seem right to you? Is there any guidance from IRS as to which approach should be used?

[Lou S.]

A fee affects the g/(l) not the ROTH basis which is the actual amount of ROTH contributions and does not change.

The participants basis is $1,000 because that was the amount of AFTER TAX ROTH deposits that they made which are recoverable tax free.

[Bird]

In my world, a fee is something that affects gains and losses, so it would come out of the gain. That, IMO, would be "right." But I can see it being problematic for a recordkeeper who needs to determine the gain and then process the distribution.

But as Lou S. notes the basis is what is tracked, and it is determined by the actual net contributions so I think generally it will be reported the "right" way.

[mbozek]

Fee is a reduction the account balance not the basis. Its no different than the amount of UBIT tax which reduces the account balance but is not considered to be a taxable distribution.