401(k) After-Tax contributions rollover to a Roth IRA
We have a client who is rolling over his 401(k) to us. He will be receiving two checks from his former employer. The first will be for his pre-tax contributions and all of the account earnings. That check is made payable to the IRA Trustee FBO the employee to be invested in a Rollover IRA.
The second check is payable to the employee and is for the after-tax contributions that he has made to the 401(k) plan.
It is our understanding from the Ed Slott book section that the after-tax distribution can be rolled tax-free into a Roth IRA in 2009.
Are we correct in our assumption?
Is it a problem that the after-tax distribution check has been made payable to the employee?
Since investment companies will not accept third party checks, is there a problem having the employee deposit the check in his bank account and issuing a personal check to the investment company?
Do the income limits of $100,000 for conversions to Roth IRA’s apply in a rollover from a 401(k) to Roth IRA? The client’s AGI significantly exceeds the current limit of $100,000
Permalink Submitted by Alan Spross on Mon, 2009-01-26 19:27
Bob,
Unfortuneately, the income limit of 100,000 for Roth conversions does apply to this situation, with 2009 being the final year for the income limit. Otherwise, this could have been done with the after tax amount being rolled over by the client with his own replacement check within 60 days. The pre tax direct rollover would also need to be completed first.
Any chance he can get the employer to hold the after tax portion until next year? If not, he could still roll it over to a TIRA and file Form 8606, but then the total 8606 basis would become subject to the pro rate rules when he does Roth conversions starting next year. Of course, this is a much less tax efficient way of getting after tax dollars into the Roth.
In fact, if he still has time to abort the entire rollover, he would be better off doing it a year from now when he can transfer the full after tax amount directly into the Roth IRA. This is addressed in Notice 2008-30, see Q&A #1 re Sec 824:
http://www.irs.gov/pub/irs-drop/n-08-30.pdf