This is the fifth in a series of Technical Updates, covering Roth IRA issues, including 2010 law changes, plan to Roth IRA rollovers, Roth IRA conversions, recharacterizations and reconversions, and taxation issues associated with Roth IRA transactions. This Part 5 discusses questions relating to rolling over Roth plan and IRA account balances. For purposes of this Tech Update, the term “Roth plan" includes both Roth 401(k) and Roth 403(b) plans.
Q-1: Can I roll over a Roth plan account to a Roth IRA, regardless of whether or not the Roth plan distribution is a qualified distribution?
Yes. If the distribution is a qualified distribution, all of the distribution will be non-taxable “basis." If the distribution is not a qualified distribution, a portion of the distribution will be taxable earnings (assuming the account has earnings). The distributing plan, upon the participant’s request, must provide information (not later than 30 days after the participant’s request) regarding the basis amount or stating the distribution is a qualified distribution. The Roth IRA taxation rules will determine the extent to which a subsequent distribution from the Roth IRA is qualified (and therefore not taxable), is a distribution of prior contributions (and therefore not taxable), or is a distribution of taxable earnings, and if so, to what extent.
Q-2: Can I roll over my entire Roth plan account to another Roth plan?
Yes, but only if the rollover is by a direct trustee-to-trustee transfer from the distributing plan to the recipient Roth plan, and the recipient agrees to account separately for the rolled over amounts. This is the same rule that applies to a rollover of after-tax employee contributions from one qualified plan (or 403(b) plan) to another. However, see Q&A-3.
Q-3: Can I roll over any of my distribution from my Roth plan account to another Roth plan by using a 60-day rollover?
Yes, but you can roll over only the taxable (earnings) portion of the distribution, and not the after-tax Roth contributions. While this rule seems impractical and very limiting, the basis for this rule is the same principle described in Q&A-2: a participant can roll over to a qualified plan or a 403(b) plan after-tax dollars (Roth contributions or after-tax employee contributions) distributed from a qualified plan or a 403(b) plan, only by a direct trustee-to-trustee transfer to a transferee plan that will account separately for the transferred dollars.
Q-4. Can I roll over a pre-tax IRA account to a qualified plan (or 403(b) plan)?
Yes. If the plan will accept the rollover, an individual can roll over any amount of pre-tax (non-Roth) dollars from an IRA to a qualified plan (or 403(b) plan). The plan will hold the rollover as in a pre-tax (non-Roth) account. You cannot roll any IRA funds (Roth or traditional) to a Roth plan account.
Q-5: Can I roll over a Roth IRA distribution to a Roth plan?
No. A distribution from a Roth IRA may be rolled over or transferred only to another Roth IRA, and not to a Roth plan. The same rule applies even if all amounts in the Roth IRA are attributable to a prior rollover distribution from a Roth plan account.
Q-6: I know I can convert a plan distribution (even if the distribution includes after-tax contributions) by rolling the distribution to a Roth IRA and including in income the taxable portion of the distribution. Can I convert after-tax contributions in a traditional IRA to a Roth IRA?
A qualified yes. Remember that for purposes of determining the tax consequences of a conversion from a traditional IRA to a Roth IRA, the IRA owner must aggregate all IRAs. So if the individual, in any IRA, has some after-tax contributions (e.g., prior nondeductible IRA contributions) and some pre-tax contributions, a portion of the conversion will be includible in income and a portion will be non-taxable return of basis. The qualified answer is: not only can you convert after-tax contributions, you must do so on a pro rata basis because of the aggregation rules.
Q-7: Is there a way to avoid totally paying tax on the conversion discussed in Q&A-6?
A qualified yes. It is possible to avoid paying tax on a conversion only if the IRAs consist solely of after-tax amounts and no pre-tax amounts. An individual who is a participant in a qualified plan or 403(b) plan (assuming the plan permits rollover contributions) may roll over to the plan all of the pre-tax IRA amounts (including earnings), leaving only the after-tax contributions in the IRA(s). This is possible because, as discussed in Q&A-3 above, an individual cannot roll over after-tax contributions to a qualified plan (except by a direct trustee-to-trustee transfer from another plan), but can roll over strictly pre-tax amounts. Having “stripped" the IRA(s) of all taxable amounts by rolling them into a qualified plan or 403(b) plan, the individual immediately (before the accumulation of any earnings on the remaining after-tax contributions) may convert the after-tax dollars to a Roth IRA, resulting in no amount of the conversion being includible in income. So the qualified answer is yes, but only for someone participating in a “cooperative" plan.
Q-8: I’ve terminated employment. My plan investments have been a disaster. I’m “throwing in the towel." If I take a distribution of my Roth plan account (which is worth less than I contributed), can I take a deduction on my income tax return for the amount of the loss?
Yes. The IRS applies the same rules to losses in Roth plan accounts that it applies in the case of losses on after-tax contributions in a qualified plan. See Rev. Rul. 72-305, cited in the preamble to the 2007 final Roth taxation regulations. However, you cannot take the loss unless you receive a total distribution.
Q-9: If I have a loss in my Roth plan account, and I take a total distribution of the account and roll over the entire account to Roth IRA, what is my basis in the Roth IRA?
Your basis in the Roth IRA is the total amount of your Roth plan contributions (adjusted for any prior distributions from the plan). The basis amount is treated as a regular contribution to the Roth IRA for purposes of determining the taxation on subsequent Roth IRA distributions. For example, assume you made $10,000 in Roth 401(k) plan deferrals, and took a total distribution when the account was $8,000. If you roll over the entire $8,000 to a Roth IRA, your basis in the Roth IRA is $10,000.
Q-10: What if, in Q&A-8, I only roll over part of the distribution?
If you only roll over part of the distribution, the amount in excess of the distribution is added to your basis and is treated as a regular contribution to the Roth IRA. For example, assume in the Q&A-8 example you retained $3,000 of the $8,000 distribution and rolled over $5,000 to a Roth IRA. In that case, the $3,000 you retained would not be taxable (because it would be a return of basis) and the $5,000 Roth IRA account would have a basis of $7,000, the amount of the basis in the Roth plan distribution ($10,000), less the $3,000 you retained.
5500 preparer letters
Those who attend our Form 5500/EFAST2 Workshop will receive a selection of sample letters. These are letters a preparer may use in communicating with the employer and others regarding preparation of the Form 5500, including:
- a letter explaining electronic filing of the Form 5500 and a step-by-step explanation of how to obtain filing signer credentials,
- a letter to the plan’s auditor regarding the importance of a timely audit and how EFAST2 impacts the audit,
- a letter to the employer informing the employer of the extended due date of the return,
- a letter advising the employer of the public disclosure of the return, and
- a letter to an employer with a short plan year advising of the return due date.
Schedule C samples
By far, the most significant change in the Form 5500 is the change to the Schedule C. Preparers universally agree on its complexity and the difficulty in determining the proper reporting of fees and expenses. In our Form 5500/EFAST2 Workshop, we will thoroughly explain the new Schedule C. As an added bonus to attendees, we will provide several sample completed Schedules C.
Form 5500 / EFAST2 – 35 cities, March – May
Mandatory electronic filing has garnered most of the attention when discussing the Form 5500. EFAST2 has overshadowed the many changes that the DOL has made to the Form 5500 and the accompanying schedules. In our Form 5500 Workshop, we will go through the Form 5500 and the Schedules on a line-by-line basis, focusing particular attention to the changes. Preparers need to understand both EFAST2 and the changes to the forms to avoid filing the same Form 5500 twice.
401(k) Plan Workshop – 22 cities, March – May
Prototype and volume submitter restatements for 401(k) plans, as well as emerging opportunities for growing Roth accounts should make 2010 a challenging year. Many employers are looking to address this year’s challenges by revisiting their plan designs and options. This workshop can help prepare you and your organization for these changes and more.
In many locations, the programs are offered back-to-back. Early registration and multi-program discounts are available. Visit our Web site now for links to additional details, dates/locations, online brochure, and to register online.