Life and Death Planning for Retirement Benefits

Chapter 5: Roth Retirement Plans

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(except to the extent of any after-tax money included in the distribution; see “B”), just as if the stock had been rolled to a traditional IRA that was then converted to a Roth IRA. The special tax deal that applies to NUA stock can NOT be combined with a Roth conversion of the stock. B. If the plan contains after-tax money. The conversion of funds from a QRP to a Roth IRA presents a planning opportunity if the participant’s account contains after-tax money; see ¶ 2.2.01 , ¶ 2.2.03 . Myron Example: Myron is retiring. His $150,000 profit-sharing plan account at Acme Widget includes $50,000 of after-tax money. He instructs the plan to transfer the entire account to a Roth IRA via direct rollover. § 401(a)(31) ; see ¶ 2.6.01 (C). Myron’s Roth conversion of his $150,000 account is “cheap” because only the $100,000 of pretax money in the account is included in his gross income. He gets a $150,000 Roth IRA but has to pay income tax on only $100,000. What if Myron converts only part of his profit-sharing plan account to a Roth? Is it possible for Myron to convert just the after-tax money to a Roth, thereby achieving a “tax-free” Roth conversion? See ¶ 2.2.04 – ¶ 2.2.05 for the rules governing the income tax treatment of partial and “split” distributions from QRPs and partial or “split” rollovers and conversions of QRP distributions and continuation of the “Myron Example.” C. Income tax withholding. A direct rollover from a QRP to a Roth IRA (or any IRA) is not subject to the mandatory 20 percent income tax withholding that normally applies to the distribution of an eligible rollover distribution from a qualified plan ( ¶ 2.3.02 (C)). However, any distributee and plan administrator can arrange for voluntary withholding even for a direct rollover. Notice 2008-30, A-6. It would presumably not be advisable to arrange for such withholding on a Roth conversion, since it would reduce the amount going into the Roth IRA. It is generally considered more favorable to pay the income tax resulting from a Roth conversion from funds held outside any retirement plan (see ¶ 5.8.01 (A)). For rollovers in 1998 ONLY, the gross income resulting from a Roth conversion could be spread equally over the four taxable years 1998–2001. For details on this election, and on the acceleration of taxation in case of distributions from the converted account prior to 2001, see the Special Report: Ancient History ( Appendix C ). The income resulting from a Roth conversion in 2010 can be reported in two equal instalments in 2011 and 2012 instead of being reported in 2010. § 408A(d)(3)(A)(iii) . Note the following points (in which the “individual” is a participant who converted his traditional IRA or nonIRA plan, or a Designated Beneficiary who converted an inherited nonIRA plan ( ¶ 4.2.05 ), to a Roth account in 2010):  The individual’s only choices are to have all of his 2010 Roth conversions taxed in 2010, or to have all of them taxed half in 2011 and half in 2012. The individual cannot make partial elections, or make different elections for different conversions occurring in 2010.  It appears that a husband and wife can make different elections if both do conversions in 2010, even if they file a joint return; however, there is no official confirmation of this conclusion at this writing. Income spreading for conversions in 1998 or 2010