401k Rollover to Roth IRA
I rolled a 401k account over to a Traditional IRA, earlier this year. The 401k was partially funded with after-tax contributions, both pre-1986 and later. Now, it appears that I could have rolled the after-tax contributions over to a Roth IRA, without tax consequences. If so, is there any way to do that now? I have other Traditional IRA accounts that I don’t intend to disturb, if that’s relevant to my question. Thanks in advance for any help.
Permalink Submitted by Alan Spross on Thu, 2008-12-11 04:44
It’s unfortuneate that more detailed IRS Regs regarding the rollover mechanics for these direct Roth conversions have not been released. I do believe that you could have first transferred the pre tax amount to your TIRA, and then either transferred the after tax amount or rolled it via a distribution to a Roth IRA. However, once those funds are in a TIRA, they can only come out pro rated.
The only way around this is to be able to transfer the pre tax amount in your TIRA to an employer plan, and then convert the remaining basis tax free.
Either way, since those after tax funds are now in a TIRA, be sure to file Form 8606 to report the added basis in your TIRA. That will prevent double taxation when you distribute funds from the TIRA or convert them to a Roth IRA.
Permalink Submitted by Jim Bachman on Fri, 2008-12-12 15:11
This topic is also of interest to me as I have a significant 401K with pre and post tax amounts. If you don’t mind I have some follow up questions:
When attempting to segregate the pre and post tax amounts and directing post tax amounts to a ROTH, what options are there for the accumulated earnings on the post-tax amount. Can they be directed to the TIRA to defer the tax or do they get “dragged along” with the post-tax contributions?
How does the $100K AGI limitation play in a rollover to ROTH? Does that cap the amount you can move to a ROTH at $100K less other income? I guess the answer to this may depend on how the earnings are treated inasmuch as the post-tax contributions would not contribute to AGI.
If I read your comment above correctly, you suggest that the sequence to follow is to first roll the pre-tax balance to TIRA, then do the ROTH?
Thanks
Permalink Submitted by Alan Spross on Fri, 2008-12-12 21:24
Earnings from post tax contributions are not separated, but grouped with the other pre tax money. Therefore, they do not get dragged along with the post tax contributions.
The 100,000 modified AGI limit still applies as it would in an IRA to Roth IRA conversion. The conversion does not count in figuring the MAGI figure, but if the other income exceeds 100,000 you cannot do a conversion at all. This applies even if your conversion was totally tax free because you rolled over all the pre tax amounts first.
Doing a direct rollover of the pre tax amount is critical because rollover rules require that a rollover is composed of pre tax balances first. That would leave just the post tax amount in the 401k, which would make the Roth conversion tax free if you qualify income wise. 2009 is the last year that the income limit applies, and anyone can qualify after that without regard to income.
If you happen to have highly appreciated employer stock in the 401k plan, the new direct Roth conversion further complicates tax planning by introducing a third option, particularly for someone with substantial after tax contributions, including possible pre 1987 after tax contributions.
Permalink Submitted by Jim Bachman on Tue, 2008-12-30 21:17
Have been doing a little poking around on other sites and came across this reference.
[quote]Rollovers of After-Tax Contributions. EGTRRA expanded the portability of retirement assets by, among other things, allowing the rollover of after-tax contributions under certain circumstances. The Act clarifies that only a “qualified trust” which is part of a defined contribution plan or a traditional IRA may receive after-tax amounts by direct rollover.[/quote]
[url]http://www.ici.org/401k/arc-news/02_pres_egtrra_impl_final.html%5B/url%5D
This seems to imply that the after-tax contributions cannot be directed to a ROTH IRA but only a TIRA. Is that the way you read it?
Thanks
Permalink Submitted by charles lore on Tue, 2008-12-30 21:40
Beginning in 2008 the rules allowed a rollover from a qp to a Roth. Previously you had to roll to a TIRA and then a ROTH but not anymore.
Further this quote may confuse the reader on an important point which is that you can never roll over after tax funds from an IRA to a QP.