Rollover in service distribution

[thepensionmaven]

Client sponsors a standalone profit-sharing plan, family only; six individual accounts with Vanguard.

Spouse thinks she know all, saw something online that allows a rollover to Roth IRA, gets husband, over 59-1/2, and plan allows for "in service” to rollover all his Vanguard accounts to individual Roth IRAs, without paying any taxes.

To my knowledge you can’t rollover unless taxes paid, but of course, could be wrong.

[CuseFan]

PSP can have in-service. A rollover to a Roth IRA is taxable but there is no 20% tax withholding because the distribution is rolled over. The taxable nature of the distribution should be evidenced by the 1099R that is issued for the distribution. 

[C. B. Zeller]

The good ol' IRS Rollover Chart explains it clearly:

Roll from: Qualified Plan (pre-tax)

Roll to: Roth IRA

Allowed: Yes (with a footnote)

Footnote says: Must include in income.

[Lou S.]

If it was done in 2025 you'll have a 1099-R at year end. If you are reconciling 2024 and they are just telling you about this now, they need late 2024, 1099-Rs and possible amended tax returns if they already filed.

Gotta love clients that rely of Google for their plan advice instead of making a phone call to the consultant who probably knows the correct answer, even if it's not the one they want to hear.

 

[thepensionmaven]

Absolutely, way too many.

Thanks

[Lou S.]

And if they want to reverse it because they found out it is a taxable conversion, they are out of luck because you are no longer allowed to unwind them. They are now irrevocable.

 

[JenniferOhio]

Following up on the original question, would folks agree that the 1099-R reporting a distribution of Profit Sharing (or otherwise non-Roth) monies to a Roth IRA would be completed as follows:

• Box 1 - Gross Amount of rollover
• Box 2 - Taxable Amount = Gross Amount 
• Box 4 - Federal withholding = $0 (because no federal income tax was withheld & deposited)
• Box 7 - Distribution Code = G (that's how I read the 1099-R instructions for distribution codes)

Thanks in advance for your reply!