401K After tax Account to Roth IRA
I have a client that is moving his 401k which had pre tax & after tax monies. They sent him a check FBO for the pre tax but sent the after tax money just in his name. Can he put it into his Roth IRA or do we need to send back and have it issued FBO.
Thank you
Permalink Submitted by Alan Spross on Tue, 2011-05-03 20:59
This is the question that does not have a solid answer.
in 2009 the IRS issued Notices (eg Notice 2009-75) that indicate that the total distribution is taxed as if it ALL went into a sole TIRA and part of it was then converted. In other words, the distribution would be pro rated to each type of IRA. However, the IRS never followed up with clarification and did not change the instructions to plan administrators how to complete the 1099R. Therefore, unless the IRS acts before year end, the client will get a separate 1099R for each distribution, one showing that the pre tax amount went to a TIRA in a direct rollover and the other showing the after tax amount distributed to the client. The client can then roll that after tax amount to a Roth IRA within 60 days and this conversion will be tax free. He should do that unless he just wants to put the money in a taxable account.
If the IRS acts, the downside is not that bad. If the IRS ruled that the plan had to change their 1099R forms to pro rate the after tax amount, then the client will have some added basis in his TIRA and would have to file an 8606 to report it. His conversion would be partially taxable because some of the pre tax money would have been rolled to the Roth. But if he does not want to pay the conversion tax he can recharacterize the conversion so all the funds end up in his TIRA. There will be no current tax, but his basis will then be in his TIRA instead of his Roth IRA. The IRS has not acted in the last 2 years, so the client is not risking much by rolling the after tax check to a Roth IRA and taking his chances.