ROLLING OVER AFTER TAX 401k FUNDS
An employee was provided two checks when she rolled over her 401k: a rollover check mnae out to , for her after tax contribution, a check made out to her.
Since it was made out to her, I assume she cannot roll it to another 401k or her IRA without it appearing to be a new contribuitoin. Can you confirm? What choices would she have other than make it a contribution for this year’s TIRA.
Permalink Submitted by Alan Spross on Thu, 2010-06-03 22:26
I think you intended to say that one check was made out to her IRA custodian and constituted the pre tax balance. Another check for the after tax amount was made out to her.
This has been standard practice for years and continues to be reported as such today. However, the IRS has issued guidance that the pro rate rules should be applied to both checks, and there are still unresolved issues on how this should be reported by both the custodian and by the taxpayer.
The check made out to the employee can obviously be cashed, rolled over to a TIRA or rolled over to a Roth IRA within 60 days. It is the isolation of the the after tax amounts that is the problem. Under the pro rate rules, some of the after tax funds would go to the TIRA and some of them would go to the Roth IRA of to the employee. But that would also mean that some basis would go to the TIRA and some of the employee check would be taxable.
The American Benefits Council has appealed to the IRS to clarify this issue and allow the direct rollover to be composed of 100% pre tax amounts and the other check 100% after tax. There would be no taxes due whatsoever in this situation. This is also the way that custodians have been issuing their 1099R forms.
Regarding your question, either way the employee could roll the second check over and it would not be considered a new contribution. As stated above, the tax treatment is what is left up in the air. If she wants to convert it to a Roth IRA, she should go ahead and do it within the 60 day period. In the event that the IRS rules otherwise, she can recharacterize the conversion if she wishes to a TIRA, and that would eliminate any current taxes. She would file an 8606 on her TIRA to document the after tax contribution to avoid double taxation in the future. I think that eventually, the IRS will agree with the Benefits Council, but if not, prior distributions might well be grandfathered according to the way the 1099R was issued. I seriously doubt that the IRS would try to unwind 2008, 2009, and now 2010 distributions as reported on the 1099R.
Also, note that the 402f Notice she probably received does not explain this properly either.