Voluntary Contribution and Roth Conversion

[Basically]

A single member plan owner asked if they can make a Voluntary contribution to the plan now (in 2024) for 2023.  AND, can it then be converted into ROTH money.  

Follow up question is, I know the client can not contribute in excess of the 415 limit.  They would be limited to the 415 limit or whatever their compensation is... whichever is less, right?

hmmm, if the voluntary contribution is after tax going in, when converted do we withhold taxes on the conversion?  

I have to look around and see what I can find.

[justanotheradmin]

Why does it matter if it is for 2023 or 2024? Usually unless there is a compensation issue that would impact 415, I don't see how it would matter. I suppose if they are wanting to do it again in 2024...

The tax impact of a Roth conversion of Voluntary After-tax should be negligible. Usually I see it where the person deposits their VAT and immediately does the conversion, hopefully turning in the Roth conversion form the same day. So no earnings or very little that would be taxable. No withholding, if there are earnings which are taxable, the participant is responsible for the tax impact outside of the plan. Assuming all of it is staying within the retirement plan. 

Do they have pre-tax amounts in the plan they can convert? Those would be taxable and are not subject to 415. So if they wanted to convert a million dollars they could, assuming the plan allows, and they are prepared to pay the tax outside the plan. 

[Basically]

This client is thinking they want to max out 2023 right now if that's allowed and  then towards the end of the year they might be able to max out for 2024.  Comes down to not exceeding the 415 limit.   They don't want to miss the 2023 opportunity.  Follow me? (or her financial advisor's thinking?)  I guess my question ultimately is, can VAT contributions be paid after the year end like a PS contribution?

[C. B. Zeller]

The deadline to make voluntary after-tax contributions is 30 days after the end of the limitation year. 1.415(c)-1(b)(6)(i)(C)

Assuming limitation year = plan year = calendar year, your client missed it by a couple of days.

[Bill Presson]

And they would have had to make the election by 12/31/2023

[CuseFan]

41 minutes ago, Bill Presson said:

would have had to make the election

Is there an election required? It doesn't have to be through payroll withholding, I thought for VAT the person could (if desired) actually just write a check and give to trustee and/or PA saying "here is my VAT contribution for PY XXXX", provided 415 is not exceeded.

[Bill Presson]

Cuse, that's probably allowed. Our administrative provisions and the basic plan document from our provider all refer to elections and we've done those in all situations. 

[Basically]

18 hours ago, CuseFan said:

I thought for VAT the person could (if desired) actually just write a check and give to trustee and/or PA saying "here is my VAT contribution for PY XXXX", provided 415 is not exceeded.

That was my understanding (not that it couldn't be done through payroll)

This is all perfect, thank you all

[Basically]

On 1/31/2024 at 4:08 PM, justanotheradmin said:

The tax impact of a Roth conversion of Voluntary After-tax should be negligible. Usually I see it where the person deposits their VAT and immediately does the conversion, hopefully turning in the Roth conversion form the same day. So no earnings or very little that would be taxable. No withholding,

Got it... "After-tax" so when converted to the in-plan ROTH no taxes need to be remitted.  

Explain to me... If someone deposits an "after tax" voluntary contribution to a plan, does it need to be converted to Roth?  Wait, did I just figure it out?  Converting it starts the Roth clock?

[justanotheradmin]

41 minutes ago, Basically said:

 If someone deposits an "after tax" voluntary contribution to a plan, does it need to be converted to Roth?  Wait, did I just figure it out?  Converting it starts the Roth clock?

VAT - only the basis stays after-tax, the earnings are taxable. If they want it to grow and include the earnings as post-tax, it has to be converted to Roth.  And yes, it also starts the Roth clocks. 

[Basically]

That explains it!  I so appreciate the help.  Watch, after all of this finding out how to do this the client will decide not to (which is fine with me).

[Basically]

On 1/31/2024 at 4:08 PM, justanotheradmin said:

The tax impact of a Roth conversion of Voluntary After-tax should be negligible. Usually I see it where the person deposits their VAT and immediately does the conversion, hopefully turning in the Roth conversion form the same day.

This client has resurfaced... asking questions.

Am I correct with this example... 

1.    Let's say that when the dust settles for the year he has room for a $35K VAT contribution and he deposits it.  He already paid taxes on the money.  If he converts it right away via an in-plan Roth conversion his 1099-R would declare taxes on the earnings alone.  The Gross distribution would indicate the total conversion but the Taxable amount would be the earnings alone.  
    
2.    1099-R Code... The code would be 2, early distribution (because he is under 59-1/2)... and G, Rollover?  
    
3.    The money path and documentation...  Where would the VAT contribution be deposited?  Can it just be deposited into an account designated for the VAT contributions and then document the intention to do the conversion on paper?  Simple as that?  Or do we need to make the deposit to the PS account and literally transfer it to the VAT account?   Have a definitive trail?

Thanks