Permalink Submitted by Alan Spross on Wed, 2010-11-17 01:10
The IRS has ruled that this cannot be done by doing twin rollovers, and they need to further clarify the “isolation of basis” problem. That said, there are some limited ways around the problem:
1) If any of the after tax money is pre 1987 contributions, those can be distributed separately, and converted. Pro rate rules do not apply to these contributions.
2) If you have the funds to replace mandatory 20% withholding, you can request a full distribution, then roll the pre tax amount first to a TIRA and then the after tax amount to a Roth IRA. But you will need to replace the withholding to complete those two rollovers, then recover the money when you file your return.
3) More convoluted……do a direct rollover of entire prior employer 401k to a TIRA, then transfer the entire pre tax balance in all IRA accounts to a current employer plan that will accept IRA rollovers. That leaves only the after tax amount in the TIRAs, which then can be converted tax free.
IRS rulings in 2009 indicate that using direct rollovers requires pro rating of basis between the IRA types, ie this is different treatment than for an indirect rollover per 2) above.
Permalink Submitted by Alan Spross on Wed, 2010-11-17 01:10
The IRS has ruled that this cannot be done by doing twin rollovers, and they need to further clarify the “isolation of basis” problem. That said, there are some limited ways around the problem:
1) If any of the after tax money is pre 1987 contributions, those can be distributed separately, and converted. Pro rate rules do not apply to these contributions.
2) If you have the funds to replace mandatory 20% withholding, you can request a full distribution, then roll the pre tax amount first to a TIRA and then the after tax amount to a Roth IRA. But you will need to replace the withholding to complete those two rollovers, then recover the money when you file your return.
3) More convoluted……do a direct rollover of entire prior employer 401k to a TIRA, then transfer the entire pre tax balance in all IRA accounts to a current employer plan that will accept IRA rollovers. That leaves only the after tax amount in the TIRAs, which then can be converted tax free.
IRS rulings in 2009 indicate that using direct rollovers requires pro rating of basis between the IRA types, ie this is different treatment than for an indirect rollover per 2) above.