For some time, a number of plan administrators have allowed clients to use after-tax money to reduce the taxable portion of a net unrealized appreciation (NUA) transaction (to offset the ordinary income tax owed on the cost of the shares) on a non-pro-rata basis.Now, says Slott, "it appears that argument is all but settled for good," as under Notice 2014-54, pre-tax money is allocated first to direct rollovers
, next to 60-day rollovers and finally, to any amounts not rolled over.
To make this selection, the recipient must inform the plan administrator before the direct rollovers
* Problems with direct rollovers
of participant distribution
The defined benefit plan allows the employee to begin receiving benefits as soon as employment is terminated, and accepts direct rollovers
only if the employee has begun to receive benefits.
avoid the 20 percent mandatory withholding.
Beginning in 2008, direct rollovers
(conversions) to Roth IRAs
Withholding not required in direct rollover
: Direct rollovers
to Roth IRAs, like other direct rollovers
, are not subject to the 20% mandatory tax withholding requirements, even though the rollover results in taxable income to the distributee.
The rules are different for 60-day rollovers and for direct rollovers
, and they are more favorable for direct rollovers
During 2006 and 2007, the provision allows donors age 701/2 and older to make direct rollovers
to a qualified charity of up to $100,000 without affecting the donor's taxable income.
Another provision allows direct rollovers
from qualified plans to Roth IRAs starting in 2008 if adjustable gross income is less than $100,000.
The Service has supplemented the instructions to Form 1099-R for reporting direct rollovers
from qualified plans or tax-sheltered annuities.
In the case of direct rollovers
, the plan administrator of the transferring plan must furnish to the transferee plan the data needed to determine when the qualifying period began and the amount of the participant's Roth contributions.