after tax 401k convert to roth
i asked fidelity to roll my pretax money to a ira and to send another check for after tax money to convert to a roth. she said they would make check for after-tax money to me. i told them i didn’t want withholding. she said they wouldn’t withold after-tax money. to be safe, i told them to send one check and i’d make two deposits: pretax into traditional and after-tax into roth. turns out i can’t do that. now they won’t take the money back unless they made an error. what are my options now. is there no way to get after tax money into roth without the prorata rules?
Permalink Submitted by Alan Spross on Tue, 2010-02-02 18:08
Why do you say you cannot do those rollovers? As long as you are still within the 60 day rollover period, and the check was made out to you, you can do the rollovers. You must make up the 20% withholding on the pre tax amount, complete the TIRA rollover first and the Roth IRA rollover second. If the distribution was made in 2009, then income limits apply to the Roth conversion portion.
If the check is made out to your TIRA custodian as a direct rollover, then you are stuck and both the pre tax and after tax amounts would go to that account. You would file an 8606 to avoid eventual double taxation on the after tax amount.
Permalink Submitted by Ryan Tyler on Tue, 2010-02-02 18:34
i can’t do it because fidelity is going to send me a 1099 saying they sent out x amount of dollars that is to be a direct rollover. if i only deposit x minus the after-tax amount into the traditional and the after-tax money in the roth then the 1099s wont match.
Permalink Submitted by Alan Spross on Tue, 2010-02-02 18:48
If this is a direct rollover, it won’t work. An indirect rollover is the way to do this, if you can replace the 20% withheld.
Has the check been issued yet, and if so does the payee name your IRA custodian FBO your TIRA? You are correct that you cannot split up a check issued as a direct rollover check.
Permalink Submitted by Ryan Tyler on Tue, 2010-02-02 20:18
i could have done it without any witholding. i could do a direct rollover of the pre-tax money into a traditional with no witholding and do an indrect rollover of the after-tax money, with no withholding into a roth. but i don’t think i can do it now because fidelity won’t take the money back and do it correctly.
http://www.kiplinger.com/magazine/archives/2009/01/sweet-deal-on-roth-ir…
Permalink Submitted by Alan Spross on Tue, 2010-02-02 21:24
I would not put a whole lot of credibility into that article, since there are no IRS Releases to back it up. Moreover, the article does not even touch on the differences between a direct rollover and an indirect rollover or how the plan would properly issue their 1099R.
Trying to split a direct rollover between the TIRA and the Roth IRA amount therefore leaves 1099R reporting to the discretion of the QRP administrator. There are still no clear IRS instructions in the 1099 R Inst. booklet or other IRS Notices that advise plan administrators how to split the taxable income between the two transfers. That will result in widely differing 1099R forms being issued for 2009. While the IRS may be inclined to follow the 1099R breakdown as issued, there is no guarantee that they will, or how they will interpret a tax return vrs the 1099R.
Conversely, doing this by indirect rollover has the full support of Sec 402(c) of the tax code, but it requires the employee to first receive the distribution from the plan and do the rollover themself.
But this seems moot in your situation since you apparently have a single check made out to the IRA custodian and you are correct that the unly escape hatch here is to have Fidelity reissue the check to you instead of the IRA custodian. You could then deposit it into your checking account and make out your own checks to each IRA as noted above. But to get them to reissue, you would have to point out that they ignored your written distribution order, but that apparently is not what happened.
Permalink Submitted by Ryan Tyler on Wed, 2010-02-03 18:27
that article is one of many. plus i have heard this from sources that would know. the administrator would need instructions from the irs on how to issue the 1099s because there would only be one, for the direct rollover. they would do a direct rollover of the pre-tax and send me a check for the after tax (indirect). there would be a matching 1099 for the contribution to the traditional. we would then deposit the indrect into a roth. too late now, i guess
Permalink Submitted by Ryan Tyler on Wed, 2010-02-03 18:28
besides, how could a company like kiplinger publish an article like that, keep it up on their website until today and not take a lot of heat if there were any question as to its legitimacy. i don’t think they would just publish articles because they have a hunch something will work.