Conversion of after tax money in 401k to Roth
My client has $1,000,000 401k with $100,000 in aftertax money contributions. My goal is to convert the 100k to a Roth and roll the 900k to a Traditional IRA.
Logic would tell me no taxes due.
Is this possible?
Do we have any IRS rulings on this?
Permalink Submitted by Alan Spross on Tue, 2010-01-12 00:26
We do not know for sure that this is possible because all the IRS Notices to date do not address this type of “tandem rollover”. You can find several threads about this on this site.
If an indirect rollover were done, then there is no question, but an indirect rollover would trigger 20% mandatory withholding on 900k, so client would need 180,000 to replace the withholding. If client then rolled first the 900k to a TIRA and second the 100k to a Roth IRA, it would meet the requirements of Sec 402(c). That Section requires the participant to do the rollover. It is not clear that a direct rollover from the plan would avoid the pro rate rules which would result in after tax funds going ratably to each type of IRA – not what you want.
I think that the IRS must clarify this soon. I do not know how plans are going to interpret this on the 1099R forms that are in process this month for 2009.