Pre and Post contributions from a 401k PSP
I would appreciate any feedback.
My client has terminated his employment and is 60 years old.
His 401k plan has 3 parts.
Pre-tax contributions
Post-tax contributions
Employer contributions
I have verified the distributions options the employee has:
The plan will not separate pre and post tax earnings. They will send the employee a check for his basis in the post tax.
I want to be able to direct roll the post tax earnings into a Roth. Is there a procedure or way to do this?
We can identify basis and earning from each of the pools of money.
I am trying to avoid rolling all of the money into one big pot and having to pay tax on the post tax earnings either at conversion or at distributions.
Thanks in advance
Permalink Submitted by Alan Spross on Fri, 2008-02-29 18:27
There is no way to get the post tax money into a Roth by treating it separately unless the plan distributes it first as pre 1987 after tax contributions. That apparently does not apply in this case.
While client can rollover that after tax amount and file Form 8606 to report the added basis to his IRA, the following conversion will pro rate the IRA balance between basis and pre tax, also done on Form 8606 that reports the conversion.
There may possibly be a way to avoid this under the new tax provision of the PPA allowing direct Roth transfers starting this year. The problem here is that the IRS has not yet issued the Regulations needed to clarify several aspects of this new transfer. One of the huge questions is whether the plan will be able to simultaneously transfer the after tax contributions to a Roth IRA and the pre tax to the client’s traditional IRA. This would circumvent the 8606 process entirely. I would not hazard a guess whether this will be permitted or whether pro rated amounts of basis will have to go to each type of IRA. It’s too late for you to even wait for this if the distribution has already been made. But if you want to defer the distribution from the plan pending the IRS Regs, there may still be a chance to accomplish what you want. I would think that the IRS needs to issue these Regs fairly soon, since the provision took effect Jan 1. Note that the 100,000 income limits do continue to apply to any Roth conversions through the end of 2009.
Permalink Submitted by Geoffrey Kasher on Fri, 2008-02-29 19:25
In speaking with the plan administrator, Hewitt Associates, I was told that they would not distribute the plan amounts into 2 separate entities. All of the monies had to be rolled out together.
Thanks for the input and help..
Permalink Submitted by Geoffrey Kasher on Fri, 2008-02-29 19:26
BTW: The distribution has NOT been made yet..