After-tax Rollovers
08/06/04, E-mail Alert 2004-16

Rollover of Basis
The Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) amended IRC Sections 401(a)(31) and 402(c)(2) to permit the rollover of after tax dollars, known as the basis, to any plan that may receive an eligible rollover. However, this may only accomplished by a direct rollover or a direct transfer to a plan that will source and track the after tax amounts separately. Of course, the recipient plan must have language to accept direct rollovers and that does not restrict such rollovers to only pre-tax dollars. Note that after tax dollars in a qualified plan may not be directly rolled into a 403(b) or a governmental 457. For our chart of rollover portability after EGTRRA click here.

A participant rollover, one in which the participant receives the funds and has 60 days to roll the funds over, may not include after tax dollars when the participant is moving their vested account balance to a qualified plan or an IRA.

A direct rollover of a participant’s entire vested account balance will include any after tax funds included in that account balance. For example, if a participant has a vested account balance of $100,000, of which $8,000 is after tax, and the participant arranges a direct rollover of the entire $100,000 to an IRA, the after tax would also be rolled to the IRA.

However, if the participant does not directly roll over the entire vested account balance, the Job Creation and Worker Assistance Act of 2002 (JCWAA) Section 411(q) states that the amount rolled over is treated first as pre-tax dollars and only after all the pre-tax dollars are rolled over will any after-tax dollars be credited to the rollover. Using the above example, if the participant directly rolled over the $92,000 of pre-tax dollars, the $8,000 not rolled over would be classified as after tax funds. Thus, after the $92,000 is rolled over, the participant could actually distribute the entire $8,000 of after-tax basis without any basis recovery rules applying.

Traditional/Rollover/SEP IRA Deductible-Nondeductible Tracking Issue
The tracking of after tax funds in a qualified plan is clearly a responsibility of the plan. This tracking is usually delegated to the plan administrator, trustee/custodian, recordkeeper and/or the payor of plan distributions. With the advent of the deemed IRA, plan administration now involves knowing the IRA rules. In addition we often get calls regarding the rollover of qualified plan after-tax funds to a traditional IRA and how the basis will be tracked in that IRA. Thus, we address the topic of the tracking of IRA Basis.

Unlike the qualified plan after tax rules, the tracking of IRA after-tax funds is the IRA owner’s responsibility and not the responsibility of the IRA trustee/custodian/issuer. The IRA trustee/custodian/issuer will typically indicate this on a Form 1099R by checking the box "Taxable Amount Not Determinable."

The IRS requires the IRA owner to track the basis for the total balance of all of his or her IRAs. Thus, it becomes impossible for any institution to know what the IRA basis is, as the IRA owner may have IRAs in other institutions. There is no obligation for an institution to track the IRA basis nor to share information with other IRA institutions. Click here for an illustration of how the IRA owner tracks his or her own after tax basis by using the IRS Form 8606 (and which reflects why generally only the IRA owner can track the IRA basis).

Bill Grossman, QPA