Converting 401-K to Roth IRA
My client has been advised that if he converts his after tax 401-K money to a Roth IRA, he may incurr taxes because of the amount of money he already has in his traditional IRAs at other custodians. I don’t think any IRAs held elsewere has any impact on the conversion. Are there any situations where the conversion of after tax money from a 401-K to a Roth is a problem. Thanks.
Permalink Submitted by Alan Spross on Fri, 2010-11-05 21:47
You are correct that traditional IRA balances have no bearing on the taxation of a direct conversion from a qualified employer plan to a Roth IRA.
HOWEVER, there are issues in attempting to convert only the after tax amounts in the employer plan due to recent IRS Rulings that need further clarification. The only way to be sure that such a conversion will not be pro rated between pre tax and after tax funds in the qualified plan is to do an indirect rollover of all the funds, make up the mandatory withholding and then first complete the pre tax rollover to a TIRA and finally the remaining after tax amount to a Roth IRA.
If this is attempted by doing direct rollovers, the IRS has stated that pro rating is required. There are probably 50 threads on this issue on this site in recent months. The IRS needs to clear up this issue, but for the last year, they have not.