Rollovers to employer plans – nondeductibles
Let’s say that taxpayer has $20,000 traditional IRA which includes $15,000 of nondeductible contributions (“basis”).
1. Can taxpayer roll that entire balance into a qualified plan assuming the plan document allows it?
2. If the $15,000 was in a IRA account and the $5000 was in a separate account (titled “rollover IRA”) would it matter? Could taxpayer roll over only the pre tax dollars?
3. Is there ability to roll over deductible contributions versus basis? Does it depend on IRS law or does it depend on the plan document?
My general understanding is that deductible and nondeductible amounts are aggregated. That is how it works if taxpayer takes a withdrawal. I assumed similar rules applied (ie the pro rata rule) in the case of roll- overs.
There is a federal government plan, the thrift plan which seems to allow for the rollover of deductible IRA only (that is how the transfer/rollover form reads. I am wondering whether the IRS allows it if the plan doc allows it – that is typically backward thinking. Usually the IRS rules govern the plan and allow plan provisions not vice versa.
[ The big question I have based on the above question and discussion – can some one recommend a resource that has a good discussion of how rollovers are treated with respect to deductible and nondeductible contributions. I am especially interested in rollovers to employer plans – qualified plans, govt plans and SEPs.
Also for folks that have taken Ed’s two day course – is this issue covered in any detail?
Thanks,
Jim [/b]
Permalink Submitted by JAMES MAGNO on Wed, 2008-01-23 17:23
Retirement Benefits Tax Guide (Spiral-bound)
by Thomas F. Rutherford (Author), Theodore, Jr. Simons (Editor)
CCH
Permalink Submitted by JAMES MAGNO on Wed, 2008-01-23 17:29
In reading IRC 402(c) etc – it appears to me that a transfer(“rollover”) from qualified plan to qualified plan can be a rollover of the entire balance which may include nondeductible contributions. Those nondeductible contributions are rare but do exist. The rollover must be a direct trustee to trustee transfer.
A rollover from an IRA can only include amounts that would otherwise be includible income ie the pre tax dollars.
I still would love to be able to put my hands on a chapter that discusses situations such as these.
Thank you – all comments welcome.
Jim
Permalink Submitted by Alan Spross on Thu, 2008-01-24 00:30
Jim,
1) No. A QRP cannot accept after tax amounts from an IRA. Doing so could potentially even cause disqualification of the plan.
2) It does not matter which account the after tax amount was originally contributed to, as all IRA accounts are viewed as combined for basis purposes. The plan is able to accept an incoming rollover up to the amount of pre tax dollars in taxpayer’s IRA accounts. Antiquated thinking with some plan administrators results in a policy of only accepting conduit IRA accounts for rollovers under the erroneous assumption that this provide assurance against receiving after tax dollars. They seem to forget that since 2002 after tax employer plan contributions can be rolled over to an IRA. The strategy of rolling IRA pre tax dollars to a QRP and then converting the remaining after tax dollars to a Roth tax free is popular, but tough to pull off if the QRP will not accept rollovers.
3) IRS law – a plan cannot accept basis from an IRA, but they can accept it from another employer plan with full accounting information and maintenance of records. If a plan accepts an IRA rollover, the dollars are deemed first to come from pre tax dollars, not a pro rated formula.
The IRS allows only pre tax amounts from an IRA to be rolled into a QRP, but plan administrators are often tougher than the IRS because they know that there is no effective way to be sure that they do not acquire basis. Many taxpayer have no idea what their basis is and/or never filed 8606 forms with the IRS.
Attached is a link to the latest portability chart that should confirm the above:
http://www.mhco.com/Charts/2008/Rollover_011008.htm