401k Post-tax to Roth IRA (in 2010)
I have some post-tax money in a 401K at a previous employer, and was thinking how I could get this money into a Roth IRA in 2010. I called my previous employer fund manager (Fidelity) and asked whether I could withdraw only the post-tax portion and not the pre-tax portion. After some reasearch he let me know that I could withdraw the post-tax portion along with its associated earnings.
Here are my questions:
1) Is this legitamite? I know that IRA assets are considered comingeled so for those that are thinking of converting a non-deductable IRA they also have to consider their deductible Traditional IRA. I just have some concerns that maybe the IRS won’t allow you to choose what portion of the 401K that can be rolled over.
2) If this is fine, how can I get that Post-tax 401K money over to a Roth IRA in 2010 with the least tax liability. Can I roll over the Post tax 401K money directly into a Roth IRA with the associated earning moving into a Traditional IRA? Would I need to establish a seperate non-deductible IRA first to put in the post-tax 401K money (in which case when doing the conversion I would need to convert my other deductible traditional IRA as well thus paying taxes)?
This has my head spinning a bit. I don’t want to screw something up here, and I received spot on feedback last year when I did the refunding of my Roth so I figured I would ask the question(s) here.
Permalink Submitted by Alan Spross on Tue, 2009-12-15 22:56
You can clearly withdraw pre 87 after tax contributions from the plan, but beyond that the situation is clouded if you want to simply convert the after tax amount only. There are several threads here that discuss this issue including a way to do it that requires taking a distribution yourself, incurring 20% withholding on the pre tax amount and then doing an indirect 60 day rollover first of the pre tax amount to a TIRA and second of the after tax amount to a Roth IRA. You have to front the withholding to complete the rollovers and do not get a refund of the money until you file your return for the year of the distribution.
His contention that you would get the earnings on the after tax amount along with the after tax contributions sounds like plan provisions for in service distributions for active employees. It does not sound right.
1) You are correct. Pro rate rules apply except for pre 87 after tax contributions. Doing the rollover described above gets around these rules and is covered in the tax code in Sec 402(c). But doing this with direct rollovers is risky since the IRS has not clearly defined how the 1099R should be completed in that case.
2) The least tax liability is -0- if the pre tax amount goes to a TIRA in total. The above method will accomplish that. That said, IF the plan does a direct rollover of your pre tax amount to a TIRA and then sends you a check for the after tax amount and ALSO issues their 1099R to reflect that the after tax distribution does not contain any pre tax dollars, you can probably roll the after tax amount to a Roth IRA indirectly. The trick is getting a commitment how their 1099R forms would look and that might be difficult to secure and have properly executed. The IRS will likely follow the 1099R to determine if you are subject to pro rating or not.
You could also wait a couple months to see if the IRS fully clarifies this issue. To date, they have issued about 3 releases on Roth conversions with after tax amounts, but have failed to recognize that employees do not want ALL their 401k balance to go to the Roth. They want to split out the pre tax amount to a TIRA. Sorry, but full clarity on this issue is still lacking as I see it.
Permalink Submitted by Christian Klim on Wed, 2009-12-16 17:23
[quote=”[email protected]“]You can clearly withdraw pre 87 after tax contributions from the plan, but beyond that the situation is clouded if you want to simply convert the after tax amount only. There are several threads here that discuss this issue including a way to do it that requires taking a distribution yourself, incurring 20% withholding on the pre tax amount and then doing an indirect 60 day rollover first of the pre tax amount to a TIRA and second of the after tax amount to a Roth IRA. You have to front the withholding to complete the rollovers and do not get a refund of the money until you file your return for the year of the distribution.
His contention that you would get the earnings on the after tax amount along with the after tax contributions sounds like plan provisions for in service distributions for active employees. It does not sound right.
1) You are correct. Pro rate rules apply except for pre 87 after tax contributions. Doing the rollover described above gets around these rules and is covered in the tax code in Sec 402(c). But doing this with direct rollovers is risky since the IRS has not clearly defined how the 1099R should be completed in that case.
2) The least tax liability is -0- if the pre tax amount goes to a TIRA in total. The above method will accomplish that. That said, IF the plan does a direct rollover of your pre tax amount to a TIRA and then sends you a check for the after tax amount and ALSO issues their 1099R to reflect that the after tax distribution does not contain any pre tax dollars, you can probably roll the after tax amount to a Roth IRA indirectly. The trick is getting a commitment how their 1099R forms would look and that might be difficult to secure and have properly executed. The IRS will likely follow the 1099R to determine if you are subject to pro rating or not.
You could also wait a couple months to see if the IRS fully clarifies this issue. To date, they have issued about 3 releases on Roth conversions with after tax amounts, but have failed to recognize that employees do not want ALL their 401k balance to go to the Roth. They want to split out the pre tax amount to a TIRA. Sorry, but full clarity on this issue is still lacking as I see it.[/quote]
Contributions were made as Post 86 after tax. I talked with someone else at Fidelity and he noted that it would be considered an “after tax withdrawel.” He noted the 1099 would note the amount that was considered pre-tax which would be the earnings on this amount. Also, he noted that I could roll over the “pre-tax” portion to an IRA to avoid paying taxes. He also noted that the Post-tax portion he couldn’t provide info on as they were still waiting on the IRS to provide guidance on the Post-tax portion. But, at the very least it sounds like I might be able to roll this money directly into a Roth (which would be perfect since there would be 0 tax liability). He said I could call back in a few months and see if they’ve gotten additional guidance. I’m inclined just to hold in the meantime while all this mess gets sorted out.
Permalink Submitted by Alan Spross on Wed, 2009-12-16 20:18
That makes sense. IRA custodians are starting to realize that there is a problem with their 1099R instructions as well as incomplete IRS Regs and Notice info with respect to handling and reporting of after tax distributions and rollovers. If you can wait, this appears to be an issue that the IRS will have to clear up very soon. 1099R forms must be issued next month.
It will be interesting to see what happens if the IRS rules after the 1099R forms have been issued and they are incorrect. Even if the taxpayer determines exactly what the 1099R will say and acts on that advice, there is still a chance that the custodians will have to re issue them resulting in taxpayers getting adverse treatment under the pro rate rules that should apply.
Permalink Submitted by Christian Klim on Fri, 2010-02-12 22:40
Does anyone know if there is any additional guidance here? Is it safe to move forward with what I suggested above?
Permalink Submitted by Alan Spross on Fri, 2010-02-12 23:23
Nothing new yet. In fact, below is another article published by Morningstar this week repeating in more detail the ambiguities in this situation. There is going to be a raft of problems now that the 1099R forms are already issued:
http://advisor.morningstar.com/articles/article.asp?docId=18603