2 Roth conv. questions- based on steps
1. I have a client who has an IRA that is mainly after-tax contributions. Can she roll that to a Roth, and in the same year (maybe the next day) roll her 401k into an IRA without it being included in the tax basis?
2. If a person is allowed an in-service distribution of just the after-tax portion of their 401k, can they roll that into a Roth, and then later (again, in theory the next day), roll over the rest of their 401k?
Permalink Submitted by Alan Spross on Tue, 2010-03-16 22:06
1) Not in the same year. It would have to be in the next year or the basis % in the IRA would be seriously diluted.
2) This is a different situation. Here a direct conversion to a Roth IRA is being done without the funds first going into a TIRA. However, there are specific plan rules regarding the classes of contributions in a 401k that can be distributed while still in service. If the plan only allows after tax contributions and perhaps their allocated earnings to be distributed, the direct Roth conversion will be mostly tax free. However, if the pre tax assets were also available, then the basis would be pro rated and that Roth conversion would have a much higher taxable portion.
If the entire 401k plan can be distributed, there are problems isolating the basis to a Roth IRA and the pre tax to a TIRA.