Multiple Xfers from 401k AT to Roth
My 401k contains some after-tax along with the related earnings. I am 60 and the plan allows multiple partial withdrawls. I would like to transfer the AT money to a Roth by doing several partial distributions this year, as I don’t want all of the money out of the market at once. I am concerned that my plan may not work as I desire.
For example assume I have:
After tax dollars AT = $10,000
Earnings which are BT = $20,000 that will come out pro-rata with AT$.
My plan is to do indirect rollovers, and I have outside money to make up for withholding:
1. Request distribution to me of $15,000 ($10,000 BT, $5,000 AT)
2. Indirect rollover $10,000 to a TIRA.
3. Next day, indirect rollover $5,000 to Roth.
4. Wait 61+ days later, then request another distribution to me of $15,000.
5. Indirect rollover $10,000 to traditional TIRA.
6. Next day indirect rollover $5000 to Roth.
I would hope that I now had $10,000 all non-taxable in the Roth and $20,000 before tax in the TIRA (no basis), and will owe no taxes for 2010 (refunded withholdings).
My concern is the IRS may ignore the timing of the withdrawls when determining what portion of each individual rollover is taxable. IE. They might contend that the 1099R showed that I took out $30,000 total for the year- $20,000 taxable and $10,000 non taxable. When I did the first rollover to the Roth (step 3), I had only rolled over $10,000 of the yearly taxable distribution to a TIRA (step 2), thus I owe taxes on that $5,000. Also, I’d end up with a $5,000 basis in the TIRA.
Does my concern have any basis?
If my concern is not valid, is the 61 days between withdrawls needed?
Thanks.
Permalink Submitted by Alan Spross on Sat, 2010-02-13 03:49
There will always be an element of uncertainty in doing this since the IRS has not released comprehensive regulations to address partial direct Roth conversions with basis involved.
That said, the order in which you propose to roll over these distributions will accomplish your objective under Sec 402(c)(2)(B) of the tax code which states that an employee rollover of QRP distributions is deemed first to be composed of the pre tax amount. Since the very next paragraph in Sec 402(c) reinforces that you must complete the rollover within 60 days to have an eligible rollover, it would be totally inconsistent for the IRS to look at a composite total 1099R for all the year’s distributions, and expect that you did not roll them over within 60 days of receipt. Generally speaking the 1099R system does not provide any dates to the IRS, just total annual amounts. If the IRS wants more detail from taxpayers, they will have to ask for it. Therefore, I would keep copies of all your distribution statements and companion IRA contribution statements which not only will show that you rolled over the distributions within 60 days, but that you contributed to the TIRA before the Roth IRA and the total contributions match the distribution statement. This is similar to pairing up a stock acquisition and sale statement to support your Sch D entry.
To be safer, do not take any distribution until you have fully rolled over the prior distribution to both types of IRAs. Also, the statement amounts will not match if you use in kind distributions rather than cash, because the asset will change value during your holding period before you complete the rollovers.
Again, re your final question, the 61 days between withdrawals is not needed as long as you complete the rollovers before taking your next withdrawal. It just makes it easier to document to the IRS should they ever ask, even though it is highly unlikely they will. About the only time the IRS even asks about 60 day deadlines is when they do a total audit for an unrelated reason.
Permalink Submitted by George Stalnaker on Sun, 2010-02-14 01:08
Thank you for responding.
It sounds like I should go ahead and put them in my existing TIRA and Roth IRA
and do not need to bother opening two new accounts just for the transfers?
Regarding in kind distributions, my 401k only allows cash distributions,
except for company stock of which I have such a little amount and its not
worth the trouble to do anything but cash it out inside the 401k.
Permalink Submitted by Alan Spross on Sun, 2010-02-14 02:02
The only possible reason to use a new Roth account would be to simplify recharacterization of the tax free conversion. However, since there are no eligibility requirements any longer to convert, and your conversion is tax free, there would be very limited reasons to recharacterize it.
Even if your Roth conversion investments had huge losses, and you recharacterized back to a TIRA since it cannot go back to the 401k, since your TIRA has mostly pre tax balances from the pre tax rollovers plus perhaps other pre tax balances, the reconversion would no longer be tax free, probably only a very small portion would be tax free.