403b with before and after tax contributions
I am working with a client who works at a hospital. He has a defined benefit pension plan. In addition, the employees can contribute before tax dollars to a 403b – with no employer contributions.
In addition to those contributions, the client also contributed after tax dollars to the same account. The money was tracked separately, labeled as “TSA” and “Personal Non-Qualified Deferred Annuity.” The client is separating from service in the next few months.
What is the correct way to transfer this money? Two separate IRAs? (I have worked with many of the 403b’s, but I have not come across a mixed account like this before.)
Permalink Submitted by Alan Spross on Sun, 2008-07-27 21:26
Client has a choice since 2002 whether to roll over the after tax funds or place them in a taxable account. If they are rolled over, a Form 8606 must be filed to report the after tax basis in the client’s IRA.
One advantage of the rollover of these funds is the ability to convert to a Roth with the after tax portion being tax free. If not eligible to convert now, he will be in 2010 when the income limit disappears. If the rollover is elected, there is no need to use a separate account, since for tax purposes all of the client’s traditional IRAs are considered as one combined account.
Another option to check out is the direct Roth conversion, which is newly available this year. If the client is income eligible for conversion, and the plan administrator will provide a transfer of the after tax amount to the Roth AND a transfer of the pre tax amount to a TIRA, this will get the funds into a Roth without pro rating the basis and using a Form 8606. A plan does not have to offer multiple transfers, so that will need to be determined.