Split 401k distributions to Roth IRA’s
If a 401k custodian is willing to issue separate direct Roth IRA transfer checks for pre tax and post tax 401k account values respectively, would that be permissible and avoid the 20% withholding requirement for indirect rollovers?
MikeC
Permalink Submitted by Alan Spross on Thu, 2009-09-10 19:37
IRS Notice 2009-75 (link below) confirms that segregating basis is not permissible except for pre 1987 after tax contributions, if any:
http://benefitslink.com/IRS/notice2009-75.pdf
Apparently, several plan administrators have assumed they can do this, but according to this release, the pro rate rules apply to each distribution. The indirect rollover method would still work, but with that method the 20% withholding must be replaced by the employee to complete the indirect rollovers and avoid any taxation. If there are pre 1987 after tax contributions, those should be directly transferred to a Roth IRA (income limits still apply in 2009) if the custodian will do a partial transfer. After this transfer has been done, the indirect rollover of the remainder can be requested.
If the withholding amount is too much to front in one year, perhaps the plan would allow a partial indirect rollover over two or three years to reduce the amount of withholding.