Designated Roth Accounts From Deferral To Distribution Wednesday, May 1 .
Designated Roth Accounts –From Deferral to DistributionWednesday, May 1, 2013William Grossman, ERPA, QPA, APRDirector of Education & CommunicationsMcKay Hochman Co., Inc.
Agenda BackgroundBenefits and Attributes of a Roth Deferral“Qualified” DistributionsThe 5-Year ClockRollovers: Direct; ParticipantDistributionsForm 1099-R Roth Conversions Qualified Rollover Contributions Differences Between Roth IRA and Designated Roth2
BACKGROUND
Background Designated Roth created by the EconomicGrowth and Tax Relief and Reconciliation Actof 2001 (EGTRRA) for 2006 tax year Section 617(a) of EGTRRA IRC §402A: Designated Roth Tax Code Section Pension Protection Act of 2006 madeEGTRRA’s retirement provisions permanent4
Background Applies to deferrals under a §401(k) plan or a§403(b) arrangement and as of 2011 agovernmental 457(b) Rules and tax treatment are the same Regulations on designated Roth accountsissued in two phases Final regulations for offering designated Roth issuedDec. 29, 2005, Effective Jan. 1, 2006 Final regulations on designated Roth distributions,rollovers and reporting issued April 27, 2007, EffectiveJan. 1, 2007 Notice 2010-84 In-plan Roth Rollover Guidance5
Effective Date Designated Roth first available for Plan Years thatbegin on or after January 1, 2006 2011 was the first year that a designated Rothaccount became 5-years old: if started in 2006 IRS issued sample language for the addition of theRoth provision Off calendar plan may add to plan, but forparticipant’s tax year beginning January 16
Adding Designated Roth to a Plan Roth is an optional provisionDiscretionary amendmentMust be in plan document to useIf adding the Roth – must be done by last day ofthe first year in which it is used (per IRS Notice2005-95 and Rev. Proc, 2005-66 and Rev. Proc.2007-44, Section 5.05) Example: Plan year ending June 30, 2012, Roth Deferralspermitted Jan. 1, 2012, provided plan amendment to add Rothis adopted by June 30, 2012. Note: IRS issued sample Roth amendment Notice 2006-447
Adding Roth to a Safe Harbor 401(k) Amendment Timing Can add Designated Roth to a Safe Harbor401(k) plan after the plan year has started, perIRS Announcement 2007-59 Can add “in plan” Roth conversion to a safeharbor 401(k) after the plan year has started, perIRS Notice 2010-84 Neither of these will spoil the SH, even though thesafe harbor notice was given out prior to thebeginning of the plan year8
Roth Treated as Elective Deferrals Roth deferrals are treated as elective deferrals underthe terms of the plan and document Contribution limitsADP testingMatching formulasVesting, 100% vestedNondiscriminationCoverageTop heavyQJSA, 5,000 consent and cash out rule combined415 annual additionsRMDs The major difference being the tax treatment9
Operational Issues “Roth only” plans not permitted by the regulations. The participant must designate the contributionas a Roth prior to deposit to the plan– Roth needs to be explained at enrollment meetingsand on enrollment forms– Roth must be included in Summary Plan Description Automatic Enrollment plans may default deferrals asRoth.– Check your plan document.– Prior to the first dollar being deferred, participants willhave the right to opt out or change their deferral10
BENEFITS AND ATTRIBUTESOF ROTH DEFERRALS
Three Required Conditions for Roth1. Deferral irrevocably designated at the timeof election as a Roth deferral (unlike IRA)2. Deferral treated as includible in employee’sincome (not pre-tax)3. Designated Roth deferrals maintained in aseparate account from pre-tax deferrals Contributions and distributions must be recordkept as separate Roth source Gains, losses, expenses, etc. separatelyallocated on a reasonable and consistent basis No forfeitures may be allocated to a Roth12
Benefits and Attributes RothDeferrals - Tax Free Earnings If deferrals left in plan long enough theearnings will be distributed tax FREE!!!! W-2 Reporting Roth included in taxable income and as deferral Pretax deferrals excluded from gross income andincluded as deferrals Box 12 Codes Roth Code AA, plus amount of Roth deferrals Pretax Code D, plus amount of pretax deferrals13
Benefits and Attributes RothDeferrals - Deferral Limit “Roths” are part of the annual deferral limit– 2013 17,500, Catch-up 5,500– Compared to 2013 IRA Roth Limit: 5,500/ 1,000Examples1. Participant Mack, age 51 Defers 17,500 as Roth and 5,500 as Catch-up (alsoas a Roth)2. Participant Jen, age 55 Maximum 17,500 5,500 23,000 Defers 11,500 Roth, 11,500 Pre-tax (Salary deferral agreement completed to place 50% inRoth and 50% in pre-tax deferrals)14
Benefits & Attributes Roth DeferralsRoth IRA & Designated Roth Contributions to an IRA (even a Roth IRA)will not affect the Roth 401(k) limit Example In 2013, Matt (age 35) contributes 17,500 in his Roth 401(k) plan and 5,500 in his Roth IRA Roth IRA has income limitation, See next slide Note: the Roth IRA has been around since 199815
Roth IRAAnnual Contribution Rules Eligibility rules Earned income from personal services Contributions may be made after age 70½ Eligibility for Roth IRA limited by AGI:PartialContributionNoContributionSingle or head 112,000 orof household less 112,001 to 126,999 127,000 ormoreMarried filingjointly 178,000 orless 178,001 to 187,999 188,000 ormoreMarried, filingseparately 9,999 or lessN/A 10,000 ormore2013FullContribution
Benefits & Attributes Roth Deferrals401(k) Advantages to Roth IRA Eligible Employees may find the fee structure ina 401(k) plan is better than in a Roth IRA Designated Roth may receive match No income limitations for eligibility to contributeto designated Roth (Roth IRA has incomelimitations) Therefore, higher income employees will be able tocontribute to Roth 401(k)17
QUALIFIED DISTRIBUTIONS18
Qualified Distributions Distribution is “qualified” if: The Roth has satisfied the 5 year requirementAND Distributable event is: After attainment of age 59½, or After the death of the participant, or If the participant is disabled Any other distribution is treated as nonqualified19
Qualified DistributionsExample 1 James first made a Roth deferral in 2006 Leaves her company in 2013 at age 50 Wants a distribution This is a non-qualified distribution Although the funds have been in the plan for more than 5years, the age 59½ requirement was not met20
Qualified DistributionsExample 2 Sarah first made a Roth deferral in 2010 Leaves her company in 2013 at age 65 Wants a distribution This is a non-qualified distribution Although Sarah has satisfied the age 59½ requirement, the 5 year period did not elapse21
Qualified DistributionsExample 3 David first made a Roth deferral in 2006Leaves his company in 2013 due to disabilityDavid is age 45Takes a distribution This is a qualified distribution Although David has not satisfied the age 59½requirement, the distribution is qualifiedbecause: Disability that meets Section 72(m)(7), and the 5 year period did elapse22
Qualified DistributionsExample 4 Robin first made a Roth deferral in 2011 Dies in 2013 at age 62 Beneficiary wants a distribution This is a non-qualified distribution Although Robin has satisfied the age 59½ requirement andthe distribution is because of death, the 5 year period did not elapse23
Qualified DistributionsBeneficiary or Alternate Payee The age, death or disability of the participant isused to determine whether a distribution isqualified in the case of an alternate payee or abeneficiary Example: Participant dies in 2009 and the survivingspouse leaves the funds in the plan until 2014 – thefive year rule will have been satisfied and thedistribution will be tax free Exception: If the alternate payee or survivingspouse rolls money to their own Roth account,then you base the qualified status on theirinformation24
Distributions That Will Neverbe Qualified Certain Distributions will never be consideredqualified (tax-free): Excess deferralsExcess contributionDeemed Loan defaultsLife Insurance ProtectionESOP Dividends25
THE FIVE-YEAR CLOCK
The 5-Year ClockYear One 5 years measured on a calendar year basis If first contribution is made in 2013, it doesnot matter if the deferrals start in January orDecember – 2013 is year number 1!!!!27
The 5-Year ClockAnnual Contributions Not Required The 5 year clock does not require that acontribution be made every year. It merelystarts from the time the first contribution ismade I contribute in 2006 and 2007 I do not contribute in 2008, 2009, 2010 I have still satisfied the 5-year requirement asof January 1, 2011 (2006, 2007, 2008, 2009, 2010)28
The 5-Year ClockPer Plan Rule Participants may have more than one 5-yearclock Every new plan that I contribute Rothdeferrals to has a separate 5 year clock UNLESS I roll over my previous fundsdirectly29
The 5-Year ClockExample 1 TJ deferred to a Roth with Employer #1 in2009 and 2010 Left Employer #1 in 2013 and left his moneyin Employer #1’s plan. 5 Year clock is still running Joins Employer #2 in 2013 and defers (Roth) A new 5 year clock starts in that plan30
The 5-Year ClockExample 2 BJ deferred to a Roth with Employer #1 in2009 and 2010 Left Employer #1 in 2013 and directly rolledhis money into Employer #2’s plan. Joins Employer #2 in 2013 and defers (Roth) The 5 year clock in Employer # 2’s plan isconsidered to have started in 2009 Employer 1 is required to send a report ofthe first year of the Roth contributions andthe amount to employer 231
The 5-Year ClockRollover to Roth IRA Rules are different if I move funds from a401(k) plan to a Roth IRA The Roth IRA has a separate tracking periodand the years in the Roth 401(k) will notapply to the Roth IRA32
The 5-Year ClockRollover to Roth IRA – Example 1 Michelle leaves employment in 2013. Shehad deferred into her Roth 401(k) for 2010and 2013 She rolls her money into her first ever NEWRoth IRA in 2013 The 5 year clock starts over again in 2013!!!33
The 5-Year ClockRollover to Roth IRA – Example 2 Raquel leaves employment in 2013. She haddeferred into her Roth 401(k) for 2010 and2012 She rolls her money to a Roth IRA in 2013 She had opened the Roth IRA in 1999 The 5-year clock on the amount rolled intothe Roth IRA has been satisfied (as it picksup the Roth IRA clock which started in1999)!!34
Rollover to Roth IRA After 401(k) RothReaches Qualified Distribution Status If the plan Roth dollars are “qualified”,then they are considered “basis” whenentering the IRA. If qualified distribution rolled into a newRoth IRA, Earnings made by the new Roth IRA (after thequalified distribution is rolled in), must wait 5years to be tax free.35
The 5-Year ClockUSERRA Affected Participants If a returning military veteran makes updeferrals, the year the veteran selects tomake up is the first year of the Rothcontribution If an election is not made by the participant, thenyou assume it is made in the first possible year forthe makeup of a Roth deferral under the terms ofthe plan Polly, a returning veteran in 2013, makes updeferrals for the 2010, 2011 and 2012 years. The Roth deferral would be attributable to the2010 year, unless Polly chose 2011 or 201236
DIRECT ROLLOVERSPARTICIPANT ROLLOVERS
Direct RolloversFrom 401(k) or 403(b) Direct rollover is the only way to movedesignated Roth contributions with the earnings DIRECT ROLLOVER - PORTABILITY CHARTTO: Roth401(k)Roth403(b)G. Roth457(b)Roth 7(b)YYYYRoth IRANNNY38
Direct Rollovers - Accepting PlanMust Permit Designated Roth A rollover of designated Roth to a qualifiedplan can only be to a plan that allows Rothdeferrals You cannot accept Roth rollovers into a ProfitSharing, 401(k) or Money Purchase planwithout a designated Roth deferral feature39
Direct RolloversReporting First Year of Clock How does the receiving plan in a rolloversituation know how many years on the 5 yearclock have expired? It is the obligation of the distributing plan toreport within 30 days of the rollover, theamount of basis and the first year of the 5year clock40
Direct RolloversReporting Requirements Recipient plan provides a report to the IRSregarding the acceptance of a Roth rollover It must include: Name and SS #Amount rolled overYear rollover is madeAny other information required to determine thevalidity of the rollover Pending issuance of the IRS form for thisreporting, still waiting 41
Participant DistributionsParticipant Rollover If a participant takes a distribution payable tohimself and later (within 60 days) wants tomake a participant rollover to Roth 401(k): only the pre-tax amount (earnings not yet qualified) may berolled to another qualified plan Note: Employee has the right to receive thesame rollover information (status of 5 yearclock) within 30 days after it is requested42
Participant DistributionsParticipant Rollover If a participant takes a distribution payable tohimself and later (within 60 days) wants torollover to a Roth IRA: then the entire distribution may be rolled to the Roth IRA Use Form 8606 to track43
DISTRIBUTIONS
Participant DistributionsGeneral Rule Roth contributions are deferrals and aresubject to the same withdrawal restrictionsfor active employees Age 59½ Financial Hardship If not taking the entire Roth account out, andit is not a qualified distribution, thedistribution must be pro-rated between theoriginal contributions and earnings45
10% Penalty Roth Amount When distributions of Roth amounts aremade – what is subject to the 10% penalty ifunder age 59½? Only the amounts that will be taxed i.e. earnings – not Roth deferrals46
Pro-Rata Distributions, NotOrdering The Roth 401(k) and 403(b) will not have thesame distribution ordering rules as the RothIRA Roth IRA – you can take after-taxcontributions out first and leave the earnings Roth plans – as stated earlier, you mustwithdraw pro-rata (if not taking the entireamount)47
Participant DistributionsSeparate Plan for Cash-out Rules Roth amounts are considered a separate plan forapplication of the involuntary cashout and automaticrollover rules, IRS created a separate model 402(f) Notice For example – if I have 800 in a Roth and 900 inpre-tax, those can be cashed out (even though thetotal is more than 1,000) If there is less then 200 in Roth, and 1,000 in othersources. The Roth is not subject to the eligiblerollover distribution rules, nor 20 percent withholdingwhereas the other sources are48
Hardship Distributions If a participant has both pre-tax and Rothdeferrals, the hardship may be calculatedusing aggregate of both, but the hardshipdistribution may be limited to pre-taxdeferrals Why would a plan want to limit the access tothe Roth deferrals for hardship purposes? See the next slides49
Hardship DistributionsDesignated Roth Issue1. Basic concept about all hardship distributions ofelective deferrals – cannot take earnings out (atleast post-1988)2. Basic concept about Roth distributions – you musttake a pro-rata distribution of earnings andcontribution How do these conflicting concepts get resolved?50
Hardship DistributionsDesignated Roth Issue1. You are limited to taking hardships from theRoth deferrals (you cannot tap into theearnings)2. But – for tax purposes, you treat thehardship as being pro-rataearnings/contribution See next slide for an exampleQuestion to ponder – Who thinks of thesethings? 51
Hardship DistributionsDesignated Roth Issue Joe has a Roth account of 10,000 ( 7,000in contributions and 3,000 in earnings) Hardship is limited to 7,000 If he takes all 7,000, he is taxed as if 4,900(70%) is after-tax deferral and 2,100 (30%)is earnings52
Hardship DistributionsDesignated Roth Issue If Joe comes back for a second hardship: the hardship calculation is treated as if all 7,000 came from the original deferrals – sothat is the amount that the next hardship isoffset by The participant may be confused because he wastaxed as if only 4,900 were Roth deferrals – sowhy is 7,000 being considered? Plus, Joe lost the ability for 2,100 in earnings toever achieve tax-free status This is why plans may want to limit hardships topre-tax53
RMDs for Roth 401(k) Not Roth IRA Difference in treatment for the Roth IRA and theRoth 401(k) when it comes to RMDs Roth IRA not subject to RMD at 70½ Designated Roth is subject to RMD rules due toCode Section 401(a)(9)! RMD may be taken from just non-Rothaccount until designated Roth is a qualifieddistribution amount, though Roth must beincluded in the calculation of the RMD Participant can opt to have RMD amount betaken just from just the designated Rothaccount. You can still rollover plan amounts to Roth IRAprior to RMD beginning date54
RMDs Is there a way to avoid Designated Roth RMDPayments? YES Roll the designated Roth to a Roth IRA The RMD for the year must be taken at the timeof the rollover, but thereafter, as part of RothIRA, there are no RMDs Beware that Roth IRA 5-year clock is satisfiedwhen making rollover from designated Roth55
Participant Loan Roth Issues For loans that are partly from designated Rothaccounts, the quarterly amortized repaymentsmust partly repay the designated Roth accountand may not fully repay either the Roth or nonRoth alone Loan defaults will never be a “qualified” tax-freeRoth distribution, per the final Roth regs. Therefore, for ease of administration andemployee communications, some documentsponsors are not offering the Roth as a sourcefor loans56
Return of Excess Deferrals Excess deferrals returned by April 15 will have notax impact on participant After all, they are post tax But earnings will be taxable Even if participant has attained age 59½ and has the 5year requirement met Makes sense since this money never should havehad Roth treatment Excess deferrals – returned after April 15th Taxed again upon distribution Not eligible for rollover57
ADP Test Refund Document can be written to give the participants thechoice of which dollars (pre-tax or Roth) are returned This assumes both types of deferrals are made inthe testing year Document can be written to dictate which dollarsare returned first If Roth deferrals being returned, earnings mustbe included. If excess contribution is 3000 ofRoth, of the 3000 Roth returned, 250 isearnings. If returned late, 10% employer penalty on the 3,000.58
Form 1099-R
Designated Roth and Form 1099-R A separate Form 1099-R must be issued fordesignated Roth account distributions. Code B is for all Roth distributions. (Qualifieddistributions and distributions which have not yetbecome qualified). Box 11 is for reporting the first year of thedesignated Roth account Box 10 is for reporting the distribution of an Inplan Roth Rollover (IRR) that has been distributedbefore 5 years after the conversion60
Designated ROTH DistributionSeverance and Partial Distribution Participant has 10,000 balance 9,400 of designated Roth contributions 600 of earnings Participant withdraws 5,000 4,700 is Roth; 300 earnings Form 1099-R Box 1Box 2aBox 4Box 5Box 7Box 11 5,000 300 60 (20% mandatory withholding) 4,700 (Roth basis)Code BFirst year of 5-year clock.61
Designated ROTH DistributionSeverance & Direct Rollover to Roth IRA Participant has 10,000 balance 9,400 of designated Roth contributions 600 of earnings Participant directly rolls 5,000 to Roth IRA 4,700 is Roth; 300 earnings Form 1099-R Box 1Box 2aBox 4Box 5Box 7Box 11 5,000 0 0 4,700 (Roth basis)Code HFirst year of 5-year clock.62
QP Non-ROTH Distribution in 2012; Severance& Direct Rollover to Roth IRA (Conversion) Participant has 120,000 balance 108,000 of ER, EE non-Roth contributions. Plusearnings 12,000 of after-tax Participant directly rolls 120,000 to Roth IRA Form 1099-R Box 1Box 2aBox 4Box 5Box 7 120,000 108,000 0 12,000 (after-tax basis)Code G63
QP Non-ROTH DISTRIBUTION in 2012Direct Rollover to Traditional IRA JP Participant has 200,000 balance 188,000 of ER, EE non-Roth deferrals earnings 12,000 of after-tax JP Participant directly rolls 200,000 to Traditional IRA Form 1099-R Box 1 200,000 Box 2a 0 Box 4 0 Box 5 12,000 (after-tax basis) Box 7Code G Form 5498, Traditional IRA Box 2: 188,000 No taxation on entire amount64
QP In-plan ROTH Rollover in 2012In-plan Roth Conversion Participant M has 75,000 balance and is over age 59½ 75,000 of ER, EE non-Roth 401(k) contributions. Plusearnings Participant M makes an in-plan Roth Rollover to adesignated Roth account of all 75,000 Form 1099-R Box 1 75,000 Box 2a 75,000 Box 4 0 Box 7Code G 2012 Form 8606, Participant Files with Form 1040 Part III: Report in-plan Roth Rollover65
QP Designated ROTHDirect Rollover to Roth IRA 2012 JP Participant has 50,000 Roth balance 50,000 Roth contributions. 4,000 of which is earnings JP Participant directly rolls 50,000 to ROTH IRA Form 1099-R Box 1 50,000 Box 2a 0 Box 4 0 Box 5 46,000 (after-tax basis) Box 7Code H 1st year of Roth 2008 Form 5498, Roth IRA Box 2: 50,000 No taxation on 4,00066
ROTH CONVERSIONSSmall Business Jobs Act of 2010,and IRS Notice 2010-84Updated byAmerican Taxpayer Relief Act of2012
Conversion of Pre-Tax to Roth From 2006 until September 27, 2010, Pre-tax §401(k) balances were not allowed tobe converted to a 401(k) Roth account. Small Business Jobs Act of 2010 created in-planRoth Rollover conversion to designated Roth American Taxpayer Relief Act of 2012 created inplan Roth Transfer as of 201368
Conversion Only Within Plans ThatHave a Designated Roth Provision Conversion can only be made in a plan that hasa designated Roth account provision 401(k) and 403(b) and, as of 2011, 457(b)governmental plans Plan may not have designated Roth provision only forconversions Not available for Profit sharing, money purchase orother plans that do not have designated Roth accountprovision69
Effective Date,Available for Law enacted September 27, 2010, conversion provisioneffective immediatelyAvailable for: 401(k),403(b) or governmental 457(b) participants orsurviving spouses Not available to non-spouse beneficiaries, but: non-spouse beneficiaries can convert to a Roth IRA70
Within Plan Conversion to Designated RothRequires a Distributable Event As with conversion from a QP to a Roth IRA, between2010 and 2012, a distributable event was required tomake a within plan conversion to a designated Roth– For 2010 conversions only, Tax may be paid in 2010, or Half amount taxable in 2011 and half in 2012 Under age 59½, 10% penalty waived Any distributable event that is eligible for rollover is valid Withdrawal restrictions apply In-service not available until after age 59½ for: elective deferrals, safe harbor 401(k) contributions QNECs, QMACs71
Within Plan Conversion to Designated RothRequired a Distributable Event In-service for employer NEC or match 2-year rule (Contribution must be in plan for 2years) 5-year of participation rule New plan provision to limit an in-servicewithdrawal for only Roth conversions This was in the joint committee report, andIRS Notice 2010-84 In-service of rollovers contributed into the plan72
In-plan Roth Rollovers Not Treated as aDistribution for the Following A plan loan transferred to the designated Rothaccount (without changing its repayment schedule) isnot treated as a new loan; Spousal consent is not required in connection with anelection to make an in-plan Roth rollover; The amount rolled over is taken into consideration fordetermining whether a participant’s accrued benefitexceeds 5,000; Optional forms of benefit may not be eliminated. Aparticipant who had a distribution right prior to therollover cannot have that right eliminated afterelecting an in-plan Roth rollover. (Q/A-3)73
2013 In-plan Roth Transfers:No Distributable Event Required As of January 1, 2013, a distributable event is notrequired to make an in-plan Roth Conversion viaan in-plan Roth “transfer”, Section 902 of American Taxpayer Relief Act of 2012,signed into law on January 2, 2013. This adds a new “transfer” option in addition tothe in-plan Roth rollover option from the SmallBusiness Jobs Act of 2010.74
2013 In-plan Roth Transfers:No Distributable Event Required As of the time this was written, we are awaitingIRS guidance on this new law. However, the following is known: The plan is required to have Roth provisionsbefore anyone can make an in-plan Rothtransfer, section 902 of ATRA Separate sourcing of each conversion is aneeded for reporting and tracking of the 5-yearconversion tracking of recapture tax From the Form 1099-R instructions for reportingdistributions of in-plan conversions before 5 yearshave elapsed75
2013 In-plan Roth Transfers:No Distributable Event Required Regarding the in-plan transfer conversion,section 902 of ATRA of 2012, provides thefollowing for any plan that offers a qualifiedRoth contribution program: “the plan may allow an individual to elect tohave the plan transfer any amount nototherwise distributable under the plan to adesignated Roth account maintained for thebenefit of the individual”76
2013 In-plan Roth Transfers:No Distributable Event Required For example: Elective deferrals prior to age 59½ Safe harbor 401(k) contributions prior to 59½ QNECs, QMACs prior to age 59½ Money purchase plan accounts that weretransferred into a 401(k) plan Need IRS guidance but believe J&S willcarry over to Roth, and if so, these fundsshould be separately sourced77
2013 In-plan Roth Transfers:No Distributable Event Required In-plan transfer conversion amendment We await IRS guidance, however, underthe discretionary amendment rules, inplan transfers may be permitted by theplan sponsor, provided a discretionaryamendment adding this option is made byplan year end.78
Tax Consequences, Form 1099-R Conversions and transfers are taxable eventsand individual making conversion must haveresources to pay the taxes due Form 1099-R necessary to report taxability oftransaction Box 1 and 2a: amount of rollover/transfer Box 7: Direct rollover code “G” NOTE: Awaiting guidance on in-plan transferbox 7 code, but it is a taxable event and willrequire a Form 1099-R79
Plan Participants – Form 8606Reporting The Form 8606 information is a direct quote from the IRSwebsite information: Plan participants who make an in-plan Roth rollover must: File Form 8606, Nondeductible IRAs, with their tax return Complete Form 8606, Part III, to report their in-plan Rothrollover Complete certain lines of Form 8606, Part IV, if they receive adistribution in that tax year of any amount of their in-plan Rothrollover "Plan participants who make an in-plan Roth rollovermust: Complete Form 8606, Part II, to report any amount convertedfrom a non-Roth IRA to a Roth IRA in that tax year File and complete a separate Form 8606, Part III, if they alsorolled over amounts from a qualified retirement plan to aRoth IRA in that tax year"80
Tax ConsequencesRecapture Tax For those converting under age 59½, the 10%penalty that was waived will be applied ifconversion withdrawn before 5 years Penalty will not apply if distribution was due toseverance from service in year age 55attained or later81
Measuring Five-taxable-yearRecapture Period 5-taxable-year period starts with the first day of participant’s tax year in whichin-plan Roth conversion made, usually Jan 1. ends on last day of individual’s 5th taxable year afterconversion. Amounts may be rolled to another Roth without penalty. Ifwithdrawn from subsequent Roth before end of 5-yearperiod, 10% recapture tax will apply. A separate designated Roth sub-account should beestablished for each in-plan Roth conversion in order toappropriately apply the recapture tax or acceleration ofincome rules.82
“Recharacterization” In-plan NOTPermitted A conversion from a traditional IRA to a Roth IRAmay be recharacterized prior to the individual’stax filing deadline, including extensions There are no recharacterizations of within planconversions back to pretax qualified plansources83
Plan Amendment Plan must have a designated Roth provision topermit in-plan Roth conversions Notice 2010-84 Q/A-20 indicates that to have aqualified Roth contribution program in placemeans to already have deferral electionspermitting Roth deferrals available at the pointwhen the in-plan conversion is to beimplemented and if that is in place, theamendment to add the designated Rothprovision to the document may be made by Dec.31, 2011.84
Plan Amendment Limiting in-plan conversion to: Only in-plan conversion permitted by Notice 2010-84 guidance Other in-service provisions may be added Caveat: Beware anti-cutback issue Rollovers into the plan Permitting conversions Permitting in-plan conversion via transfer85
Roth IRA ConversionAdvantages Vs. In-planRoth IRA Advantages Traditional IRA to Roth IRA may berecharacterized No RMD during participant lifetime No distributable event required to accessIn-plan conversion advantages Creditor protection Possibly less fees Possible loan86
Other Considerations Individual must have ability to pay tax on amountconverted Withdrawing additional amount above conversion andhaving 100% withholding Requires distributable event If under 59½, distribution above conversion issubject to 10% penalty Disclosures Disclosure to participant in SMM of plan amendment Don’t wait the 210 days Of taxes due upon conversion, 402(f) Notice87
Measuring Five-yearDesignated Roth ClockThe five-year designated Roth cl
Roth IRA Annual Contribution Rules Eligibility rules Earned income from personal services Contributions may be made after age 70½ Eligibility for Roth IRA limited by AGI: 2013 Full Contribution Partial Contribution No Contribution Single or head of household 112,000 or less 112,001 to 126,999 127,000 or more Married filing
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Initial Value of IRA: 200,000 Convert in 2014 to Roth IRA A Traditional IRA may be converted to a Roth IRA, but income taxes are generally paid on the taxable amount of the Traditional IRA converted to Roth IRA. In exchange, qualified distributions from the Roth IRA are received income tax-free. Traditional IRA No Conversion Taxes Roth IRA
Initial Value of IRA: 200,000 Convert in 2018 to Roth IRA A Traditional IRA may be converted to a Roth IRA, but income taxes are generally paid on the taxable amount of the Traditional IRA converted to Roth IRA. In exchange, qualified distributions from the Roth IRA are received income tax-free. Traditional IRA No Conversion Taxes Roth IRA
Page 4 of 11 Step 3 IRA type Select one: Traditional IRA Contribution1 Rollover/Transfer2 Roth IRA Contribution1 Invest/move my Roth IRA or Designated Roth Plan account from another company2 Invest/move my Traditional IRA or SEP-IRA from another company and convert to a Roth IRA2, 3 Rollover my qualified plan from another company and convert to a Roth IRA2, 3, 4
section 402(c)(8)(B)) to a Roth IRA (a "conversion"). 1.11. Participant. "Participant" means you, the individual who signed the Application. 1.12. Roth IRA. "Roth IRA" means an individual retirement plan (as defined in Code section 7701(a)(37)) designated at the time it is established as a Roth IRA under Code section 408A. The
Rollover of ROTH 401(k)/403(b) account balance to a ROTH IRA. Rollover of ROTH deferrals to another 401(k), 403(b) or governmental 457 plan's ROTH elective deferral account This direct rollover is for (please check one): Total Vested Balance OR Specific Amount Account Information:
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