SRIP

[Paradox]

My employer offers a Supplemental Retirement Income Plan (SRIP) that allows me to contribute 10% after-tax income every pay period. This plan is a money purchase pension plan. It allows in-service withdrawals while still employed. Anyone familiar with this plan? I want to withdrawal after-tax contributions and roll it over to a Roth IRA. My questions are:

1) Should I withdraw only the after-tax contributions and roll over to a Roth IRA? Is this allowed? If I choose to roll over the investment earnings as well I will be subject to an automatic 20% federal income tax withholding, a 10% federal tax penalty, any applicable state tax penalties plus ordinary income tax.

2) Since contributions are taken out every pay period, I will have to do an in-service withdrawal every pay period to avoid any gains. Should I just leave the gains and worry about it after I retire?

3) Should I just do one big in-service withdrawal on after-tax contributions only and rollover into a Roth IRA at the end of the year? Not sure how to take advantage of the Roth IRA with this plan. Anyone have a better idea?

[spiritrider]

You need to read the plan document to determine plan details. That can have a significant impact on plan rules. Without further information, we have no idea if this is a qualified or non-qualified plan (409A). If it is a qualified plan, is it a defined contribution (DC) plan (401a, 401k, 403b, 457b) or a defined benefit DB) plan. Etc...

1. it is almost certain that you can not withdraw/rollover only the employee after-tax contributions. Both the employee after-tax contributions and pre-tax earnings would very likely be subject to pro rata treatment.
2. Same.
3. Same.

[Paradox]

According to Vanguard, this is a defined contribution plan and allows in-service withdrawals. The rules allow only two withdrawals per year and both the after-tax contributions and the earnings must be withdrawn. I always assumed any after-tax contributions could be withdrawn without penalty like Roth IRA. So that answers one of my questions. But how should I do a rollover if I contribute after-tax every two pay periods and allowed only two withdrawals per year? I can't keep the funds invested in a money market account to prevent gains. It has to be invested in mutual funds. I guess I can rollover every 6 months but that would mean higher taxes on the gains.

Another thing Vanguard mentioned (which I thought was unusual) is rollover the funds to an outside broker was faster than doing it with Vanguard. Anyone know if this is true?

[spiritrider]

• With most employee after-tax accounts you can:
  • rollover both the employer after-tax contributions and pre-tax earnings to a Roth IRA with the pre-tax earnings being taxable or
  • rollover the employee after-tax contributions to a Roth IRA and the pre-tax earnings to a traditional IRA with both rollovers being tax-free.
• Only indirect rollovers of pre-tax earnings are subject to 20% mandatory withholding. If you do these by direct rollover, there is no withholding.
• If you are using the Backdoor Roth, any pre-tax balances in all traditional, SEP and SIMPLE IRA accounts om 12/31 are included in any pro rata taxation of any Roth conversion that year. If the plan accepts pre-tax IRA rollovers, believe it or not, you can roll the pre-tax earnings back into the plan preventing any pro rata treatment. If not you would be better off just rolling over the employee after-tax contributions and pre-tax earnings to a Roth IRA and paying the taxes.

[Paradox]

Just to be sure. Can I rollover my pre-tax balance directly into my Roth IRA? I don't need to do the backdoor conversion?

[Tim]

See spiritrider comment.