After Tax 401k Contributions to Roth IRA. Existing IRA’s
I have a client with after-tax contributions in his 401k. He is turning 70 1/2 and is going to be rolling out of the plan. He has Traditional IRA’s, as well.
The after-tax amounts can be sent directly to his Roth IRA, and the pre-tax amounts into his regular IRA’s? But, is this considered a “conversion”, and therefore subject to the pro-rata conversion rules? Or can we avoid “conversion” taxes since it’s not going through the traditional IRA conduit?
Ratio of after-tax amount in 401k to combined traditional pre-tax amount in 401k plus traditional IRA’s is about 1/10th, i.e. after-tax is about 10% of total qualified money.
Permalink Submitted by Alan Spross on Fri, 2008-11-07 02:34
I believe this can be accomplished based on the following link which indicates that under the 2002 JCWAA legislation, rollovers to IRAs are considered first to come from the pre tax amount. Accordingly, if the client does a direct rollover to a TIRA of the pre tax amount first, what is left should be able to go to the Roth IRA directly, with no 8606 form or consideration of existing TIRA balances.
One possible sticking point is getting the plan to offer two transfers rather than one. Also, note that if client turns 70.5 this year, the RMD must be withheld from the first transfer and would therefore be taxable.
http://www.mhco.com/Library/Articles/2004/ARoll_Portability_080504.html