401k rollover pre-tax and after tax dollars
How do the new 2010 Roth IRA rules apply to after tax dollars within a company 401K? Can an individual retired from his/her company split the rollover and roll the pre-tax dollars to a Traditional IRA and rollover the after tax dollars directly to a Roth IRA? Is this allowable assuming the 401k will be a full rollover of all pretax and after tax monies?
Permalink Submitted by Alan Spross on Tue, 2010-01-05 19:06
Short answer is that we do not know for sure because the IRS has not yet clarified this issue. You can probably find a couple dozen detailed discussions on this question by searching this site.
However, there IS one sure way to do this and that is to take a full distribution of the account. The problem here is the 20% mandatory withholding that the client must replace. First, the client rolls over the pre tax amount to a TIRA, and then rolls over the after tax amount to a Roth IRA. Tough to to this now when 2010 withholding cannot be recovered until next year, although client could cut back on other tax payments starting right away. This method works because it is specifially outlined in Sec 402(c) of the code when the PARTICIPANT does the rollover. We do not know if this can be done by direct rollover because of the pro rate rules that likely apply.
The only way in which 2010 rules affect this issue is that there is no longer an income limit for Roth conversions.