Rollovers Between Puerto Rico and U.S. Retirement Savings Plans
By Edgardo Barreto, J.D.
We have a client who relocated from Florida to Puerto Rico and wants to roll over his account balance from his previous employer’s 401(k) plan in Florida to his new employer’s Puerto Rico plan, or to a Puerto Rico IRA. Can this be done as a tax-deferred rollover?
No. While Puerto Rico is a U.S. jurisdiction, it has its own tax code. The P.R. Tax Code provides specific rules for qualification of retirement plans covering employees within its jurisdiction. While it is possible to have a retirement plan that is qualified under both the P.R. Tax Code and the U.S. Internal Revenue Code (IRC)—referred to a a “dual-qualified plan”—more often than not, Puerto Rico plans are qualified only under Puerto Rico rules.
IRC Section (Sec.) 402(c) provides that the portion of a rollover eligible for distribution from a qualified trust is excluded from income if rolled over to an eligible retirement plan. In general, eligible retirement plans include: an IRA under IRC Sec. 408(a), 408(b), or 408(A), another qualified retirement plan under IRC Sec. 401(a), an annuity plan under IRC Sec. 403(a), an eligible deferred compensation plan under IRC Sec. 457(b) which is maintained by an eligible governmental entity, and an IRC Sec. 403(b) plan.
Puerto Rico IRAs and Puerto Rico plans that are not qualified under those IRC Sections are not included in the eligible retirement plan definition under IRC Sec. 402(c)(8)(B). Thus, such a transfer will not be tax-deferred as an eligible rollover under IRC Sec. 402(c), and any pretax amounts so transferred will be taxable as U.S. income.
If the client relocated back to Florida from Puerto Rico, returned to work for the Florida employer, and began participating in that employer’s 401(k) plan, could he roll over his Puerto Rico plan balance to the 401(k) plan tax-deferred?
No. Under the P.R. Tax Code, an eligible rollover distribution from a Puerto Rico qualified trust is excluded from income if rolled over to an eligible retirement plan under the P.R. Tax Code, which generally includes only Puerto Rico plans and Puerto Rico IRAs.
Because the 401(k) plan is not qualified under the P.R. Tax Code, it is not an eligible retirement plan under P.R. Tax Code. Thus, such a rollover will not be tax-deferred under the P.R. Tax Code.
What about rollovers between savings arrangements that are qualified under both U.S. and P.R. rules?
The only tax-deferred rollovers allowed under both the IRC and the P.R. Tax Code are those that occur between employer-sponsored retirement plans that are qualified under both IRC Sec. 401(a) and the P.R. Tax Code. In other words, tax-deferred rollovers are allowed between dual-qualified retirement plans only. IRC Sec. 401(a) plans include profit sharing/401(k) plans, as well as stock bonus, money purchase, target benefit, and defined benefit pensions plans. Such plans can be dual-qualified. IRC Sec. 403(a) and 403(b) plans, on the other hand, cannot be.
IRA requirements under the IRC and under the P.R. Tax Code are not compatible, however. So although a retirement plan may hold both qualifications, there is no such thing as a dual-qualified IRA. As such, tax-deferred rollovers are not allowed between a U.S. IRA and a Puerto Rico IRA, or between a dual-qualified retirement plan and an IRA from either jurisdiction.
