IRS Relents! Notice 2014-54 permits Basis Isolation

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Alan S.
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IRS Relents! Notice 2014-54 permits Basis Isolation

Post by Alan S. »

It took 5 years, but the IRS has released the attached taxpayer friendly Notice 2014-54, agreeing that the taxpayer will have the ability to do such things as twin direct rollovers (pre tax to TIRA and post tax to Roth) without concern that the IRS would force a pro rating of the basis to both IRA types.

http://www.irs.gov/pub/irs-drop/n-14-54.pdf

The official Regs are pegged to 1/1/2015, but it is clear that such rollovers done starting today can follow these guidelines, and there is even a retroactive component to this. It may take plan administrators a little time to digest this, but many have been proceeding as if this ruling had been in place all along.
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Re: IRS Relents! Notice 2014-54 permits Basis Isolation

Post by retiredjg »

Oh my! :shock:
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Re: IRS Relents! Notice 2014-54 permits Basis Isolation

Post by technovelist »

I'm amazed that anyone can interpret that gibberish. But it sounds like good news anyway. :confused
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Re: IRS Relents! Notice 2014-54 permits Basis Isolation

Post by matto »

So just to be clear, this means that the mega roth backdoor (post tax 401k --> Roth IRA) is explicitly allowed?
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Re: IRS Relents! Notice 2014-54 permits Basis Isolation

Post by denovo »

technovelist wrote:I'm amazed that anyone can interpret that gibberish.
+1

Beam the sscritic signal to explain it for us.
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Re: IRS Relents! Notice 2014-54 permits Basis Isolation

Post by BrandonBogle »

Alan S. wrote:It took 5 years, but the IRS has released the attached taxpayer friendly Notice 2014-54, agreeing that the taxpayer will have the ability to do such things as twin direct rollovers (pre tax to TIRA and post tax to Roth) without concern that the IRS would force a pro rating of the basis to both IRA types.

http://www.irs.gov/pub/irs-drop/n-14-54.pdf

The official Regs are pegged to 1/1/2015, but it is clear that such rollovers done starting today can follow these guidelines, and there is even a retroactive component to this. It may take plan administrators a little time to digest this, but many have been proceeding as if this ruling had been in place all along.
While I am all for making things easier on us, I don't understand what has changed. In my case, I rolled my post-tax 401k to a Roth directly and could have rolled my pre-tax 401k to a tIRA, but chose not to. Granted, these would have been two separate transactions. Are you saying it can be done as one now? Or are you actually talking about indirect rollovers, not direct rollovers? Currently, you are only permitted one indirect rollover a year. So if I did post-tax 401k -> me -> Roth, then I could NOT do pre-tax 401k -> me -> tIRA.
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Re: IRS Relents! Notice 2014-54 permits Basis Isolation

Post by Tabaxus »

Does this actually prevent pro rata issues if you're not pulling the entire amount out of the account?
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Re: IRS Relents! Notice 2014-54 permits Basis Isolation

Post by jane1 »

Tabaxus wrote:Does this actually prevent pro rata issues if you're not pulling the entire amount out of the account?
Appears (although my interpretation could be wrong since I could barely understand the examples!) that the amount distributed is still subject to pro-rata rules between pre-tax and after-tax, so you can't rollover just the after-tax into a Roth.
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Re: IRS Relents! Notice 2014-54 permits Basis Isolation

Post by Alan S. »

Tabaxus wrote:Does this actually prevent pro rata issues if you're not pulling the entire amount out of the account?
It does not change the mix of pre tax and post tax amounts that the plan requires to be distributed, but gives you control over where these amounts go. Any basis you receive can be rolled to your Roth or you can request the plan to do direct rollovers of these amounts for you. Before, one of the safe methods was to have everything paid to you and then you had to deal with mandatory withholding and doing rollovers yourself in the right order. Now you do not have to worry about any of that.
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Re: IRS Relents! Notice 2014-54 permits Basis Isolation

Post by Alan S. »

BrandonBogle wrote:
Alan S. wrote:It took 5 years, but the IRS has released the attached taxpayer friendly Notice 2014-54, agreeing that the taxpayer will have the ability to do such things as twin direct rollovers (pre tax to TIRA and post tax to Roth) without concern that the IRS would force a pro rating of the basis to both IRA types.

http://www.irs.gov/pub/irs-drop/n-14-54.pdf

The official Regs are pegged to 1/1/2015, but it is clear that such rollovers done starting today can follow these guidelines, and there is even a retroactive component to this. It may take plan administrators a little time to digest this, but many have been proceeding as if this ruling had been in place all along.
While I am all for making things easier on us, I don't understand what has changed. In my case, I rolled my post-tax 401k to a Roth directly and could have rolled my pre-tax 401k to a tIRA, but chose not to. Granted, these would have been two separate transactions. Are you saying it can be done as one now? Or are you actually talking about indirect rollovers, not direct rollovers? Currently, you are only permitted one indirect rollover a year. So if I did post-tax 401k -> me -> Roth, then I could NOT do pre-tax 401k -> me -> tIRA.
First, the easy part. The one rollover limitation does NOT apply to any distributions from a qualified plan OR to rollovers from an IRA TO a qualified plan. In other words, when a plan other than an IRA is on either end of the rollover, there is no limit on the number of rollovers.

As for your situation, this sounds like a rollover from an after tax sub account (with earnings from that sub account), which all along has been distributable separately from the other parts of the plan. That has always been available and was not subject to question. However, if you wanted to extend your sub account rollover to isolating basis such that the earnings were rolled to your TIRA and the after tax contributions to your Roth, the Notice does come into play because it confirms that you could have isolated your basis by doing this by direct rollovers rather than taking distributions and rolling them yourself.
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Re: IRS Relents! Notice 2014-54 permits Basis Isolation

Post by bsteiner »

Notwithstanding this, unless you can get the money out in the near future, or you can do a backdoor Roth, contributing after-tax money to a plan or IRA turns the investment income and gains on it into ordinary income, much like an annuity.
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Re: IRS Relents! Notice 2014-54 permits Basis Isolation

Post by placeholder »

Yes one of the underpinnings of the Mega Backdoor Roth was in service rollovers of after tax contributions however based on the highly unscientific poll here most plans that allow such contributions also permit the distributions.
http://www.bogleheads.org/forum/viewtop ... 1&t=104829
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Re: IRS Relents! Notice 2014-54 permits Basis Isolation

Post by Wagnerjb »

Alan - many thanks for posting this and highlighting the implications for us. It seems that while this is an improvement for many, it won't allow a Boglehead to cherry-pick his after-tax money out of his 401k plan.

Let's say he has $200,000 in his 401k plan, of which $20,000 is after-tax money. He wants to take out the $20,000 and use it for a good purpose (downpayment, buy a Porsche, college, whatever). Under these rules, if he withdraws $20,000 it will still be deemed to be composed of $18,000 of pretax and $2,000 of after-tax money, which he can separate and direct to two different accounts. But the only way to get his after-tax money out is to take a complete distribution, right?

Thanks.
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Re: IRS Relents! Notice 2014-54 permits Basis Isolation

Post by retiredjg »

matto wrote:So just to be clear, this means that the mega roth backdoor (post tax 401k --> Roth IRA) is explicitly allowed?
I've been hoping that Alan S would address this because I know he can do a better job. But since he hasn't, I'll give my own interpretation.

It is my understanding that what has been called the "mega roth backdoor" was always explicitly allowed when the after-tax money is held in a separate sub-account within the 401k/403b plan.

It seemed that only a very small number of people in the business have ever questioned that. And the question seemed to revolve around whether a sub-account should or could be treated as something separate from the rest of the 401k account. Most people agreed that the pre-tax sub-account is a separate entity and could be distributed without pro-rating with the rest of the 401k account. And it has been obvious that employers have handled it that way for years.


I don't think this ruling changes the legitimacy of this maneuver (mega back door) at all. It simply makes it easier to get money moved to where you want it if you want to keep your after-tax money separate from it's earnings (which is pre-tax money). Before, there were several ways to accomplish this (isolating the basis), some of which were not simple and at least one of which fell into an area of conflicting legal opinion. This should end that. We hope.
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Re: IRS Relents! Notice 2014-54 permits Basis Isolation

Post by Alan S. »

Wagnerjb wrote:Alan - many thanks for posting this and highlighting the implications for us. It seems that while this is an improvement for many, it won't allow a Boglehead to cherry-pick his after-tax money out of his 401k plan.

Let's say he has $200,000 in his 401k plan, of which $20,000 is after-tax money. He wants to take out the $20,000 and use it for a good purpose (downpayment, buy a Porsche, college, whatever). Under these rules, if he withdraws $20,000 it will still be deemed to be composed of $18,000 of pretax and $2,000 of after-tax money, which he can separate and direct to two different accounts. But the only way to get his after-tax money out is to take a complete distribution, right?

Thanks.
Not usually. If the after tax money is in a separate sub account (defined in Sec 72(d)(2) separately accounted for by the plan, the balance in that sub account can be distributed separately from the rest of the plan balance. Note that the earnings generated on the 20k balance must stay in the sub account as well. For example, let's say you made 20k of after tax contribution and over the years that particular money generated earnings of 5k. Your after tax sub account balance would then be 25k. You could usually distribute the full 25k and only owe taxes on the 5k of earnings. The other 175k of pre tax dollars in the plan would not be considered in determining the taxable amount of your distribution. Pro rating does apply to the partial withdrawals of the sub account so if you withdrew only 10k, then 2k of that would be taxable earnings. Your plan provisions will determine whether your distributions come first from the sub account automatically, or whether you must specifically request your distribution come ONLY from the sub account balance.

Another special situation exists if you made PRE 1987 after tax contributions that are separately accounted for by your plan. These contributions can be distributed WITHOUT any earnings by separately by request.

The subject IRS Notice does not address sub accounts or pre 87 after tax contributions because there has been no question or debate regarding the distribution rules for these accounts. Now if there was no sub account in your plan and no pre 87 after tax contributions, then your point would be correct. There would be no way to get ONLY the after tax 20k out of the plan. The Notice does not change the mix of pre tax and after tax amounts distributed to you, rather it provides you with the flexibility to direct the destination of the pre or post tax amounts you receive (destination options are pre tax retirement plans, designated Roth and Roth IRAs, and taxable).
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Re: IRS Relents! Notice 2014-54 permits Basis Isolation

Post by retiredjg »

I'd like to mention, for the benefit of newer people following this thread, that an after-tax contribution is not the same thing as a contribution to Roth 401k (even though Roth 401k money is after tax).

So if you have be scratching your head wondering what in the heck are these crazy people talking about, that might help you understand. We are not talking about taking out your Roth 401k money - you can't do that without penalty (unless there is an exception) while you are still working for that employer.
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Re: IRS Relents! Notice 2014-54 permits Basis Isolation

Post by Alan S. »

Articles paraphrasing the Notice are starting to emerge. Here is an example of one couched in less technical language:

http://www.investmentnews.com/article/2 ... ution-rule

There is no question that the IRS backed themselves into a corner when they issued Notice 2009-68, which called for pro rating the basis in pro portion to the size of each receiving rollover account, similar to what an 8606 does when reporting a conversion. There were several conflicts with both the tax code and with the existing 1099R reporting instructions for plan administrators. After 5 years of IRS study, this Notice confirms that the taxpayer friendly resolution that was adopted was the one we expected and were hoping for.
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Re: IRS Relents! Notice 2014-54 permits Basis Isolation

Post by JohnF »

Alan S. wrote:
Tabaxus wrote:Does this actually prevent pro rata issues if you're not pulling the entire amount out of the account?
It does not change the mix of pre tax and post tax amounts that the plan requires to be distributed, but gives you control over where these amounts go. Any basis you receive can be rolled to your Roth or you can request the plan to do direct rollovers of these amounts for you. Before, one of the safe methods was to have everything paid to you and then you had to deal with mandatory withholding and doing rollovers yourself in the right order. Now you do not have to worry about any of that.
When I request a roll over from my 401k after tax subaccount they send me a check made out to the IRA account (Roth or Traditional) specified in the request. With a check made out to a specific IRA, how do I direct the after-tax portion to my Roth and remaining pretax to Traditional IRA? (Both IRA’s are with Vanguard.)
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Re: IRS Relents! Notice 2014-54 permits Basis Isolation

Post by Alan S. »

JohnF wrote:
Alan S. wrote:
Tabaxus wrote:Does this actually prevent pro rata issues if you're not pulling the entire amount out of the account?
It does not change the mix of pre tax and post tax amounts that the plan requires to be distributed, but gives you control over where these amounts go. Any basis you receive can be rolled to your Roth or you can request the plan to do direct rollovers of these amounts for you. Before, one of the safe methods was to have everything paid to you and then you had to deal with mandatory withholding and doing rollovers yourself in the right order. Now you do not have to worry about any of that.
When I request a roll over from my 401k after tax subaccount they send me a check made out to the IRA account (Roth or Traditional) specified in the request. With a check made out to a specific IRA, how do I direct the after-tax portion to my Roth and remaining pretax to Traditional IRA? (Both IRA’s are with Vanguard.)
If the check specifies a certain type of IRA, there is nothing you can do about that unless the plan administrator is willing to re issue it as two checks. Usually the after tax sub account only contains a small amount of earnings and employees are willing to pay taxes to roll the total to a Roth IRA. However, there are now 3 ways to isolate the basis in order to get the pre tax amount rolled to your TIRA and the larger after tax amount to your Roth IRA:

1) Request the plan to issue two direct rollover checks, one to TIRA and the other to Roth IRA respectively. Some plans have offered this in the past despite the uncertainty about it. Now that the IRS has given the green light, it should be only a matter of time until all plans will do this.
2) If your plan will not do this yet, you can still request a distribution paid to you in a single check. You must then do the 60 day rollovers yourself, first to TIRA and then to Roth. This has been OK as along, but it requires you to replace the 20% withheld on the taxable portion to complete the rollovers, so it is problematic for larger pre tax amounts.
3) Do a direct rollover of the entire balance to your TIRA, then roll the total pre tax amount of all your non Roth IRAs back into the plan and convert what is left to a Roth IRA tax free. This is cumbersome as you need to get the plan to do what you want twice to complete the process.

Things will be much easier and less risky with the recent IRS Notice. Employees would then use method 1) above unless they also wanted some of the after tax amount in cash for spending.
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Re: IRS Relents! Notice 2014-54 permits Basis Isolation

Post by retiredjg »

And I'm guessing method #1 will not be popular with one other group of people - those who are also doing back door contributions to Roth IRA (not the mega back door, but the plain ole back door).
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Re: IRS Relents! Notice 2014-54 permits Basis Isolation

Post by donall »

My head is spinning after trying to read the IRS notice, thank you Alan S for the interpretation. Does the IRS notice mean that all of the money in the 401K must be distributed, or can there only be a partial twin distribution?
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Re: IRS Relents! Notice 2014-54 permits Basis Isolation

Post by Alan S. »

donall wrote:My head is spinning after trying to read the IRS notice, thank you Alan S for the interpretation. Does the IRS notice mean that all of the money in the 401K must be distributed, or can there only be a partial twin distribution?
This overall topic IS confusing because there always seems to be exceptions to the general rules.

Most plans will allow partial distributions. For example, while you are still employed plans will restrict what you can withdraw according to your age. Your elective deferrals cannot be withdrawn before 59.5. After separation, you cannot be denied full access to your account (must settle any loans), but most will still let you request a partial distribution. When you get a partial distribution it will generally be pro rated between pre tax and post tax over the entire non Roth plane. Some plans will recognize after tax sub accounts prior to separation, but after separation they throw the after tax sub account into the total pot and that will change the pro rate math.

Whatever the pre tax vs post tax math generates, the Notice lets you direct the destination of those amounts but does not affect how the plans calculate those amounts. Note that my reference to post tax amounts excludes designated Roth accounts, which are under separate rules. The Notice also clarifies that for isolation of basis issues, whether the funds come out as a direct rollover or as a distribution no longer matters.
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Re: IRS Relents! Notice 2014-54 permits Basis Isolation

Post by mcnugget »

Alan S. wrote:
...
However, there are now 3 ways to isolate the basis in order to get the pre tax amount rolled to your TIRA and the larger after tax amount to your Roth IRA:

1) Request the plan to issue two direct rollover checks, one to TIRA and the other to Roth IRA respectively. Some plans have offered this in the past despite the uncertainty about it. Now that the IRS has given the green light, it should be only a matter of time until all plans will do this.
2) If your plan will not do this yet, you can still request a distribution paid to you in a single check. You must then do the 60 day rollovers yourself, first to TIRA and then to Roth. This has been OK as along, but it requires you to replace the 20% withheld on the taxable portion to complete the rollovers, so it is problematic for larger pre tax amounts.
3) Do a direct rollover of the entire balance to your TIRA, then roll the total pre tax amount of all your non Roth IRAs back into the plan and convert what is left to a Roth IRA tax free. This is cumbersome as you need to get the plan to do what you want twice to complete the process.

Things will be much easier and less risky with the recent IRS Notice. Employees would then use method 1) above unless they also wanted some of the after tax amount in cash for spending.

i thought we also discussed, for the persons having minimal gains, to just direct roll the whole check to the roth, and just pay the taxes on the gains...
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Re: IRS Relents! Notice 2014-54 permits Basis Isolation

Post by Calm Man »

Although this doesn't affect me, I am confused. (There was an article on this on forbes.com today too.) For arguments sake, assume that all an employee has is a post-tax 401K. There might have been say 100K of contributions and it grew by 50K. Is it treated like a non-deductible IRA< where the basis only is excluded from taxes? Or can it all be rolled into a Roth IRA? If the latter, wow, that is amazing.
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Re: IRS Relents! Notice 2014-54 permits Basis Isolation

Post by Alan S. »

Calm Man wrote:Although this doesn't affect me, I am confused. (There was an article on this on forbes.com today too.) For arguments sake, assume that all an employee has is a post-tax 401K. There might have been say 100K of contributions and it grew by 50K. Is it treated like a non-deductible IRA< where the basis only is excluded from taxes? Or can it all be rolled into a Roth IRA? If the latter, wow, that is amazing.
If the plan is eligible for distribution, there is always the option to roll the entire balance to a Roth IRA. In your scenario, the gains would be taxable and the after tax contributions would not since they have already been taxed.

A prior post mentioned just rolling over the entire amount if the taxable amount is small. Sure, that can be done and is easier and less complicated. If you think that regular conversions are beneficial to you this is what you would do since partially taxable rollovers to Roth would be even more beneficial.

For for those who do not wish to pay current taxes on any part of the rollover, isolation of basis opportunities are no longer debatable. You could either request twin direct rollovers of 50k to each type of IRA, and if the plan is not up to speed yet on this Notice, you can request a full distribution and do your own rollovers. But doing your own 60 day rollovers in this situation will require you to come up with the 20% withholding on the pre tax amount (10k) from other funds to complete the rollovers. There are other methods that are more complex, so you would request the twin rollovers first.
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Re: IRS Relents! Notice 2014-54 permits Basis Isolation

Post by Alan S. »

Kaye Thomas of Fairmark has now posted a summary on the Fairmark website regarding the implications of Notice 2014-54.
In particular, note the advice on HOW to request a split rollover from the employer plan. Here is the article:

http://fairmark.com/retirement/roth-acc ... onversion/
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Re: IRS Relents! Notice 2014-54 permits Basis Isolation

Post by placeholder »

Calm Man wrote:Although this doesn't affect me, I am confused. (There was an article on this on forbes.com today too.) For arguments sake, assume that all an employee has is a post-tax 401K. There might have been say 100K of contributions and it grew by 50K. Is it treated like a non-deductible IRA< where the basis only is excluded from taxes? Or can it all be rolled into a Roth IRA? If the latter, wow, that is amazing.
It would just like you had made non deductible contributions to a traditional IRA and let it grow for years until the value was 50k more and then did a conversion to Roth so 50k would be added to your taxable income in the year of conversion which is why those of us who do it are concerned about a separating basis on occasion.
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IRS Issues 401(k) After-Tax Rollover Rules

Post by TX_TURTLE »

[Thread merged, see below. --admin LadyGeek]

Sorry if this was already raised in some other thread... I tried the search function and couldn't find it :happy.
This new guidance seems to make the roll over of after tax contributions a lot easier. See links below.

http://www.forbes.com/sites/ashleaebeli ... ver-rules/

http://www.seacoastonline.com/article/2 ... 101151/BIZ
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Re: IRS Issues 401(k) After-Tax Rollover Rules

Post by Lynette »

deleted as I did not read the other thread.
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Re: IRS Issues 401(k) After-Tax Rollover Rules

Post by livesoft »

Is this thread related? (Yes, it is.)
http://www.bogleheads.org/forum/viewtop ... 2&t=147196

I didn't delve into it because it will not apply to me.
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Re: IRS Relents! Notice 2014-54 permits Basis Isolation

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Re: IRS Relents! Notice 2014-54 permits Basis Isolation

Post by bsteiner »

Lynette wrote:...I'll start to make After-Tax contributions to my 401K. I plan to retire in about 4 years. ...
This works well if you can convert to a Roth soon after you make the contribution (so that the income and gains will be tax-free). However, if you can't convert to a Roth soon after you make the contribution, it's like buying an annuity (except without the costs of an annuity) -- you'll convert the investment income and gains on the contribution to ordinary income.
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Re: IRS Issues 401(k) After-Tax Rollover Rules

Post by Alan S. »

And here are the observations of Michael Kitces on this Notice:

http://www.kitces.com/blog/irs-notice-2 ... onversion/
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Re: IRS Relents! Notice 2014-54 permits Basis Isolation

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Re: IRS Relents! Notice 2014-54 permits Basis Isolation

Post by LadyGeek »

FYI - I merged TX_TURTLE's thread into here, which is in the Personal Finance (Not Investing) forum (taxes).
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Re: IRS Issues 401(k) After-Tax Rollover Rules

Post by peppers »

Alan S. wrote:And here are the observations of Michael Kitces on this Notice:

http://www.kitces.com/blog/irs-notice-2 ... onversion/

Nice summary by Mr. Kitces. Thanks for the link Alan.
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Re: IRS Relents! Notice 2014-54 permits Basis Isolation

Post by placeholder »

Lynette wrote:I don't think I can convert immediately.
You should make sure because according to the poll here the vast majority of people reporting who had plans that allowed after tax contributions also permitted in service rollovers of those (note that the normal age restrictions on deferrals/Roth don't apply here so the plan is legally allowed to provide the service).
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Re: IRS Relents! Notice 2014-54 permits Basis Isolation

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Re: IRS Issues 401(k) After-Tax Rollover Rules

Post by retiredjg »

Alan S. wrote:And here are the observations of Michael Kitces on this Notice:

http://www.kitces.com/blog/irs-notice-2 ... onversion/
If I read this correctly, Kitces believes the whole 401k is involved (and pro-rated) in an in-service withdrawal, rather than just an after-tax sub-account. I have trouble understanding Kitces so maybe it's just me.

Anybody else think that's what he's saying?
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Re: IRS Relents! Notice 2014-54 permits Basis Isolation

Post by placeholder »

Lynette wrote:Thanks. I can make in-service withdrawals so maybe I can. The issue is research and implementing this as hours of HR are limited and I'm very busy at work. Next year .. this year make after tax contribution. In any event even if I do have to pay tax on the interest it won't be so significant as I plan to retire in a few years. Another complication is that I cannot have money in an IRA as it would be subject to RMD. It might be more hassle than it is worth.
What probably should do is make your contributions now then early in 2015 get a rollover of the after tax amount and probably go to Roth with the entire thing as a small amount of earnings usually isn't worth going through the effort of separating basis even if they've made the easy way explicitly legal.
Lynette
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Re: IRS Relents! Notice 2014-54 permits Basis Isolation

Post by Lynette »

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Last edited by Lynette on Wed Dec 06, 2017 8:30 am, edited 1 time in total.
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retiredjg
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Re: IRS Relents! Notice 2014-54 permits Basis Isolation

Post by retiredjg »

Lynette wrote:Can my company deduct taxes on the After Tax portion and can I roll the remainder to my Roth IRA? I know that in the past I withdrew an after tax portion and paid tax on it. At that time I did not know why there was an after tax section there. A colleague asked his CPA and was told that he could only take out a portion based a percentage of the whole 401K or something like that. Some of the HR reps are more knowledgeable than others. This is another reason I want to wait for them to be given training on how to handle this situation. My megacorp is very cautious in what they will allow. I think that that is good. I don't want to be audited.

I'll also check this out with my CPA when she does my tax returns in February. Another issue is how this will be handled by my beneficiaries! I'm ignoring this .. for now .. as my savings are for my old age.

Thanks.
You pay tax for money that goes into your after-tax sub-accounts. So no, your company does not get to deduct anything. (Assuming I understood your question).

Some plans are set up so that you can withdraw from the after-tax sub-account without affecting your tax-deferred or your Roth 401k money. Other companies are not set up that way. So what your colleague's CPA is true for some companies and not true for others.

Your plan document will tell you what you can and cannot do. If you have to pro-rate the tax-deferred and Roth sub-accounts, you don't want to do that. You'd be better putting your extra money into taxable than into the after-tax sub-account.
Lynette
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Re: IRS Relents! Notice 2014-54 permits Basis Isolation

Post by Lynette »

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Last edited by Lynette on Wed Dec 06, 2017 8:30 am, edited 1 time in total.
mcnugget
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Re: IRS Issues 401(k) After-Tax Rollover Rules

Post by mcnugget »

Alan S. wrote:And here are the observations of Michael Kitces on this Notice:

http://www.kitces.com/blog/irs-notice-2 ... onversion/

can someone explain to me where the "waiver" is described for separate accounting post tax sub acoounts? reading this new kitces article, along with my own reading of the new documents, it seems like while you can isolate your post tax money well enough, you cannot necc isolate the ratio/amount of how much you withdraw at one time for partial distributions (what some my call only distributing postax basis and gains). most of these examples lump post tax gains with the pretax money, such that if my post tax gains are 10% of my pretax account, i need to take out more than those gains in order to get my whole post tax basis out....

from kitces...
"Notably, as pointed out earlier, the rules do still require that when the funds leave the 401(k) plan (before the recipient decides how to allocate them), after-tax funds are allocated pro-rata to the funds that are leaving and those that are left behind – which means in practice if the account owner wants to get all of the after-tax funds out to do a Roth conversion, they need to get all of the 401(k) plan funds out in the aggregate, if only so the full amount of the pre-tax can be rolled over to a traditional IRA while the full amount of the after-tax are converted to a Roth. If only part of the money leaves the account in the first place, only part of the after-tax funds are available for a Roth conversion. This will generally be a non-issue for those who are separating from service from the employer in the first place and eligible for a full distribution to roll over, it may limit the ability of those who are still working to fully engage the strategy unless the plan really does allow in-service distributions of the entire account."

so i think retired asked basically the same question, interested as well...

i can see where kaye gives the most cut and dry example of exactly what we all want to do right here,

http://fairmark.com/retirement/roth-acc ... ion-rules/

"Fortunately, your company maintains a separate subaccount for after-tax contributions and the investment earnings they produce. (For an explanation of these subaccounts, see Basis Recovery from Employer Plans.) In your case, the subaccount has a value of $40,000, because the after-tax contributions have produced $10,000 of investment earnings. If you take a withdrawal from this subaccount, only 25% of the payout will be taxable because 75% of the the subaccount consists of after-tax dollars.

The new rules do not make it possible to withdraw the after-tax dollars while leaving the pre-tax dollars (the investment earnings) in the employer plan. If you withdraw $30,000 (the amount of your after-tax dollars), 25% of that withdrawal will be taxable, and 25% of your after-tax dollars will remain in the employer plan."

but i have yet to find any reference of how we can assume so...
especially when old tira prorata required you to prorata across all separate tira accounts (seems similar)
Last edited by mcnugget on Mon Sep 29, 2014 3:40 pm, edited 3 times in total.
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retiredjg
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Re: IRS Relents! Notice 2014-54 permits Basis Isolation

Post by retiredjg »

Lynette wrote:The reason I asked about paying tax on the interest of the After Tax portion and roll that into an IRA and the After Tax portion to a Roth IRA is that I am nearly 71. I cannot have any balance in my IRA or else I would have to pay RMDS on it. I will see if I can find anything in the Plan documentation. If this is a new ruling, it likely won't be there .. yet.

As I mentioned I'll figure this out next year - going hiking at the end of October and a cruise to the Dalmatian coast in December. I also spent a most depressing weekend reading about trust and will - Beyond Grave by Jeffrey Condon - I messed up my beneficiaries as I had them designated as "my will". One of my heirs is in S. Africa. Too much stuff to consider this year.

Thanks for the advice.

Lynette
If you pay tax on the earnings of the after-tax portion, you can roll the earnings part into Roth. Since you want to avoid RMDs, that might be the best approach. However, if the earnings on the after tax portion is quite large, it might be best to just leave it all where it is or send it to tIRA anyway - the RMD should be pretty small. Or maybe you just don't want to mess with RMD at all.

The part about sub accounts is not new. That part of your plan will not need updating. You either have sub-accounts or you don't - or at least that is my understanding. If you have sub-accounts you likely can take a distribution from just the after-tax portion without affecting the rest of your 401k.

When/if you find your plan documentation, look for the part about "employee contributions". In spite of what it sounds like, "employee contributions" is the money you put in the after-tax sub-account. The "elective deferrals" (the $17,500 this year) goes into traditional 401k or into Roth 401k.
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retiredjg
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Re: IRS Issues 401(k) After-Tax Rollover Rules

Post by retiredjg »

mcnugget wrote:
Alan S. wrote:And here are the observations of Michael Kitces on this Notice:

http://www.kitces.com/blog/irs-notice-2 ... onversion/

can someone explain to me where the "waiver" is described for separate accounting post tax sub acoounts? reading this new kitces article, along with my own reading of the new documents, it seems like while you can isolate your post tax money well enough, you cannot necc isolate the ratio/amount of how much you withdraw at one time for partial distributions (what some my call only distributing postax basis and gains). most of these examples lump post tax gains with the pretax money, such that if my post tax gains are 10% of my pretax account, i need to take out more than those gains in order to get my whole post tax basis out....

from kitces...
"Notably, as pointed out earlier, the rules do still require that when the funds leave the 401(k) plan (before the recipient decides how to allocate them), after-tax funds are allocated pro-rata to the funds that are leaving and those that are left behind – which means in practice if the account owner wants to get all of the after-tax funds out to do a Roth conversion, they need to get all of the 401(k) plan funds out in the aggregate, if only so the full amount of the pre-tax can be rolled over to a traditional IRA while the full amount of the after-tax are converted to a Roth. If only part of the money leaves the account in the first place, only part of the after-tax funds are available for a Roth conversion. This will generally be a non-issue for those who are separating from service from the employer in the first place and eligible for a full distribution to roll over, it may limit the ability of those who are still working to fully engage the strategy unless the plan really does allow in-service distributions of the entire account."

so i think retired asked basically the same question, interested as well...
Yes, I'm confused about this as well. Kitces, in the past, seemed to ignore separate sub-accounts. Alan S has posted the IRS discussion of separate accounts several times. I've never been able to figure out why Kitces doesn't seem to take that into account. However, Kitces is not an easy read for me and I'm never really sure what he is saying.

You might look in the thread about Mega Backdoor Roth to find what you are looking for there.
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Alan S.
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Re: IRS Relents! Notice 2014-54 permits Basis Isolation

Post by Alan S. »

Lynette,
With respect to doing the after tax sub account rollover of the entire balance to your Roth IRA, what you do with the earnings portion (pre tax) should be determined using the same considerations as any TIRA to Roth conversion. Are you able to do it at a tax rate that is lower than or at worst equal to what you will pay in retirement? If so, then roll the entire sub account to Roth ASAP before more gains are generated. Also do this if the earnings in the account are too small to bother isolating.

Conversely, if your current tax rate is higher than post retirement, then you should isolate the basis even if it involves facing a small RMD from the TIRA receiving the earnings. For the first few years, your RMDs are only 4 -6% of your account value, so those taxes are deferred for years and also spread over all years.

retiredjg, you are correct. Kitces is ignoring after tax sub accounts in his blog. Either that, or he is assuming a post separation distribution when some plans no longer separate sub accounts, even when they did for active employees. In cases like that the after tax contributions just blend in with the entire 401k account and the entire account is distributable and subject to pro rating to determine the pre tax and post tax amounts distributed.
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Re: IRS Relents! Notice 2014-54 permits Basis Isolation

Post by placeholder »

Lynette wrote:Can my company deduct taxes on the After Tax portion and can I roll the remainder to my Roth IRA?
An employer can only take a tax deduction on their contribution not yours unless you were asking about withholding rather than deduction.
mcnugget
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Re: IRS Issues 401(k) After-Tax Rollover Rules

Post by mcnugget »

retiredjg wrote: Yes, I'm confused about this as well. Kitces, in the past, seemed to ignore separate sub-accounts. Alan S has posted the IRS discussion of separate accounts several times. I've never been able to figure out why Kitces doesn't seem to take that into account. However, Kitces is not an easy read for me and I'm never really sure what he is saying.

You might look in the thread about Mega Backdoor Roth to find what you are looking for there.

http://fairmark.com/retirement/roth-acc ... yer-plans/

And here...

http://fairmark.com/retirement/roth-acc ... treatment/

Kayes reasoning, I didn't dig enough...
Lynette
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Re: IRS Relents! Notice 2014-54 permits Basis Isolation

Post by Lynette »

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Last edited by Lynette on Tue Jan 08, 2019 7:38 pm, edited 1 time in total.
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