Roth conversion of 401k after tax contributions
A client directly rolled over a 401k into two IRA accounts earlier in 2008. One IRA account received only after tax monies (9% of total) while the other received only pre tax/untaxed growth (91% of total).
Considerations:
– the employer plan explicitly (and seemingly inexplicably) did not allow a direct rollover of the after monies directly to a Roth IRA. This was clearly our goal with the after tax monies.
– the clients’ joint income is above the maximum limit for a 2008 Roth conversion.
– the client has no other IRA’s;
– pretax and after tax monies have not been commingled;
– client has never taken any distributions from the IRA;
– employer indicates they are unwilling to receive ‘back’ the monies rolled over;
Under these circumstances, can the after tax monies maintain their tax advantaged statua without being aggregated with the after tax monies when the first distribution is taken. In other words, can the after tax,’untainted’ account be deemed to be the source of IRA draws?
Thanks, Bob
Permalink Submitted by robert feyche on Wed, 2008-12-17 21:26
The last paragraph’s first sentence should read:
” Under these circumstances can the after tax monies maintain their tax advantaged status without being aggregated with the [b][u]pre [/u][/b]tax monies when the first distribution is taken? Thanks, Bob
Permalink Submitted by Alan Spross on Wed, 2008-12-17 21:54
Robert,
Unfortuneately, once these funds are contributed to an IRA account, they become subject to the pro rate rules for taxation of distributions or conversions. They are effectively commingled for tax purposes just by being in IRA accounts, notwithstanding separate accounts.
The only way around this now would be to have a current or future employer accept an incoming rollover of the pre tax IRA account. The fact that this account holds only rollover funds makes this more likely to be acceptable to an employer plan that accept rollovers.
Due to the modified AGI in excess of 100,000, no Roth conversion could have been done in 2008, either directly or through the TIRA. So what the former plan would not do could not have been done anyway.
All the client can do now is to file Form 8606 reporting the after tax rollover to the TIRA. That will allow for all future distributions to be only partially taxable.
Permalink Submitted by robert feyche on Thu, 2008-12-18 16:16
Thanks Alan. That appears to be the best, albeit roundabout. strategy.