Post Tax 401k Deferrals Rolled into IRA
A client has rolled the post tax contributions from his 401k into an IRA. There are both Pre 87 and Post 86 monies that have been rolled.
Can client do a tax free recharacterization or conversion into a Roth?
If so, what are the rules.
The amount rolled is about 400k
Permalink Submitted by Alan Spross on Fri, 2008-09-12 23:11
No, once these funds are in the IRA, a Form 8606 is completed on the next tax return reporting the added basis to the total of all IRAs. A conversion can be done if modified AGI is now over 100,000, and a pro rated portion of the conversion will be tax free based on the % of basis. The conversion is also reported on Form 8606, which calculates how much of that conversion is taxable. That ratio depends on how much the 400,000 plus any prior basis relates to the total of all year end values in client’s IRAs.
Perhaps the client should have waited somewhat longer to determine the mechanics for the direct Roth conversion from the 401k, first available this year. Certainly, the pre 87 amount could be converted tax free to the Roth, but for the other amounts the IRS needs to clarify if the client could have transferred the post 86 amount to the Roth and the pre tax amount to a TIRA. In that case, no taxes would be due, and Form 8606 would not have been necessary. Another possible hitch here is how many transfers the plan would have been willing to do. This paragraph is moot now that the funds are already in a TIRA.
Permalink Submitted by Clyde Wolf on Sat, 2008-09-13 23:34
I believe Alan-oniras meant to say, “A conversion can not be done if modified AGI is now over 100,000,,,,”
Permalink Submitted by Alan Spross on Sun, 2008-09-14 01:10
Right – “now” was supposed to be “not”. Need to proofread more!