Pre and Post 401K transfers
I have a client who has a $1.5 Million 401K, but $1.1 Million is made up of pre-tax and employer matching contributions. The other 400K is made up of post tax contributions. He is 58 years old. I am trying to transfer 550K of the pre-tax to a TIRA, leaving the other 550K in the plan because of its low expenses and transfer the 400K post tax money to a ROTH IRA. I am concerned about the pro-rata rule as I have never ran into this situation before. I know there was a post two days ago regarding a Fidelity transfer, but I wanted a little more clarity.
The client and I were able to re-allocate his funds online putting 700K pre-tax money into one fund and 400K of the post tax money into another. We did this so when i submit the transfer all of it comes from the 700K pre-tax bucket.
Thank you in advance for your help.
Permalink Submitted by Alan Spross on Thu, 2009-12-17 23:33
There are probably a couple dozen threads on this issue over the last 6 months, and the IRS has not yet clarified that the after tax amount can be split out avoiding the pro rate rules on distributions done by direct rollover. The only sure way to do it is by indirect rollover, but doing that exposes the client to 20% mandatory withholding on the pre tax portion. I feel that the IRS must clarify this issue within a couple months because the 1099R forms for 2009 must be out next month and plan administrators do not have complete instructions on how to handle the after tax portion.
Permalink Submitted by charles lore on Sun, 2009-12-20 16:02
Why not do a direct rollover to TIRA of 100% of money. THen roll back ALL of pre tax to plan leaving after tax which you convert to ROTH. Now after that is done roll 1/2 of pre tax to TIRA. THis assumes plan is still active.