As many of you know, the concept of a “Back Door Roth” IRA is relatively simple. It allows taxpayers with higher incomes $132,000 or more if you’re single, and $194,000 or more for married couples filing jointly in 2016, to fund their Roth accounts through contributions to traditional IRA accounts and subsequently convert them to a Roth. When the IRS removed income limits on conversions in 2010, anyone with funds in a traditional IRA account became eligible for a Roth conversion.
Planning to use the Back Door Roth IRA technique? Be mindful of the IRA aggregation rule. In a situation when a taxpayer has more than one IRA account, the rule requires that for purposes of computing the taxable amount of any distribution, all of the IRA accounts will be considered as one combined account. Effectively upon conversion, only a pro-rata portion of non-deductible contributions will be converted tax-free even though a separate account has been established for the conversion. Let’s look at the following example:
Facts: Taxpayer (assuming under age 50) has a $100,000 in an existing IRA account; opens a separate traditional IRA account and contributes $5,500 with intent to convert that amount to a Roth account.
Result: Only $286.55 ($5,500/105,500=5.21%) of the $5,500 after-tax contributions will be converted on a pro-rata basis and the difference of $5,213.45, will be treated as a taxable distribution. Therefore, after the conversion the taxpayer will end up with $5,500 in a Roth IRA account and $100,000 in a traditional IRA with a tax basis of $5,213.45.
Please note the aggregation rule applies on an individual taxpayer basis; meaning that for the married couple the husband’s and wife’s IRA accounts are not aggregated together. Also, any employer sponsored retirement plan such as a 401(k) is not aggregated; however, SEP IRA accounts commonly used by self-employed individuals are aggregated.
The resolution for many taxpayers could be rolling IRA funds into an existing 401(k) plan as long as the employer’s plan allows for such roll-in contributions. Similarly, for self-employed taxpayers a solo 401(k) can be set up and IRA/SEP IRA funds subsequently rolled over to that plan. Both of these options will help taxpayers effectively avoid the IRA aggregation rule and effectively perform the Back Door Roth IRA conversion strategy.
Congratulations! March 15th has come and gone and your 401(k) compliance testing is done and refunds have been issued. Now you can relax! Or can you? You still need to make sure your Form 5500 is filed for last year. Failing to file on time or failing to file the Form 5500 with audited financial statements, if required, can be quite costly. Don’t let this deadline sneak up on you.
Form 5500 must be filed electronically by the last day of the 7th calendar month after the plan year-end. For calendar year 2013 plans, this is July 31, 2014. Filing an automatic extension, Form 5558, extends the deadline an additional 2 ½ months, to October 15th for calendar year end plans. A penalty of up to $1,100 a day can be assessed for each day a plan administrator fails to file a complete and accurate return!
That deadline may seem far away, but if you are a large plan filer (generally more than 100 participants at the beginning of the plan year) and you must file audited financial statements with your Form 5500, you need to start the process now. Typically, once compliance testing has been completed, the third-party administrator and your custodian can move forward in providing you with an audit package and certified trust report. Be on the lookout for these items from the end of March to any time in May, depending on the provider. Once you know when these reports will be available, it is important that you reach out to your audit firm immediately to schedule the plan audit. If you want to file by the July 31st deadline, you need to schedule the audit early enough to allow enough time to resolve any issues identified.
The time that elapses between the onsite audit fieldwork and issuance of the final audit report can vary significantly. In order to minimize the turnaround time, communication between you and your auditor and timely follow-up on open items are key, and must be demonstrated by all involved parties. Agree upon a timeline with the auditor upfront, meet your commitments and make sure they meet theirs. If issues arise, dedicate resources to resolving the issues as soon as possible. If all parties work together and communicate, you should not have any problem meeting the filing deadlines. However, if you start the process too late, and don’t prioritize effectively, you could find yourself in a stressful position on October 14th.
For more information on Form 5500 or other filing requirements, please contact your Aronson advisor or Jillian Gobbo at 301.231.6200.
It’s the time of year to start thinking again about the audit of your benefit plan. If you are happy with the service you receive, and your audit goes smoothly and the deadline is met, that’s great! However, if you typically just go through the motion of engaging the same firm you have always used, you may be doing yourself a disservice. Be sure to ask yourself these questions:
Do you have questions about how the audit can be a valuable tool to you as a plan fiduciary? Contact Aronson LLC’s Employee Benefit Plan Services Group or email Kate Petrillo at firstname.lastname@example.org.
The Internal Revenue Service has announced the 2014 cost-of-living adjustments for various limits affecting employee benefit plans. The more common limits are detailed below for 2013 and 2014.
If you should any questions about how these limits apply to you please contact Mark Flanagan of Aronson’s Employee Benefit Services Group at 301.231.6257.