Permalink Submitted by Alan Spross on Tue, 2011-08-02 20:35
Yes, after separation and in some cases while still employed.
The complex portion is how much of the pre tax amount must also be distributed, and how to separate the after tax amounts so they all go to the Roth while the pre tax amounts go to a traditional IRA. The success or that is dependent on the rollover method used.
Permalink Submitted by Justin Whelan on Tue, 2011-08-02 21:06
Thanks.
By rollover method, you are describing the method the current custodian accepts the request. I would want the current custodian to recognize this is a split rollover with after tax funds being deposited into the Roth and pretax being deposited into a traditional. Correct?
Permalink Submitted by Alan Spross on Tue, 2011-08-02 21:31
Yes, that is the best outcome, but the IRS wants distributions to be pro rated between basis and pre tax amounts per Notice 2009-68. Problem is that they have not provided processing instructions for the 1099R issued by custodians that require pro rating to occur. Doing such rollovers by direct rollover is a gamble due to this gray area.
However, if the rollover is done indirectly, ie paid to you instead of the new plan and then YOU split up the funds by completing the pre tax TIRA rollover first and the after tax amounts to a Roth IRA second, you have the protection of Sec 402(c)(2) of the tax code which says that the pre tax amount is deemed to be rolled over first. But to afford this, you have to be able to replace the 20% withholding on the pre tax portion with other funds. That is the downside of this strategy, but you get a tax refund for the money the following spring.
Now, if you are still working for the company, some plans include after tax accounts which can be distributed while the pre tax money cannot. In that case, you do not have to separate the after tax money because you cannot take out the pre tax funds. If you are in this situation, check with your plan to see what options they offer for the after tax contributions. Often, the earnings on those contributions must also come out, but the earnings amounts are usually relatively small.
Permalink Submitted by Alan Spross on Tue, 2011-08-02 20:35
Yes, after separation and in some cases while still employed.
The complex portion is how much of the pre tax amount must also be distributed, and how to separate the after tax amounts so they all go to the Roth while the pre tax amounts go to a traditional IRA. The success or that is dependent on the rollover method used.
Permalink Submitted by Justin Whelan on Tue, 2011-08-02 21:06
Thanks.
By rollover method, you are describing the method the current custodian accepts the request. I would want the current custodian to recognize this is a split rollover with after tax funds being deposited into the Roth and pretax being deposited into a traditional. Correct?
Permalink Submitted by Alan Spross on Tue, 2011-08-02 21:31
Yes, that is the best outcome, but the IRS wants distributions to be pro rated between basis and pre tax amounts per Notice 2009-68. Problem is that they have not provided processing instructions for the 1099R issued by custodians that require pro rating to occur. Doing such rollovers by direct rollover is a gamble due to this gray area.
However, if the rollover is done indirectly, ie paid to you instead of the new plan and then YOU split up the funds by completing the pre tax TIRA rollover first and the after tax amounts to a Roth IRA second, you have the protection of Sec 402(c)(2) of the tax code which says that the pre tax amount is deemed to be rolled over first. But to afford this, you have to be able to replace the 20% withholding on the pre tax portion with other funds. That is the downside of this strategy, but you get a tax refund for the money the following spring.
Now, if you are still working for the company, some plans include after tax accounts which can be distributed while the pre tax money cannot. In that case, you do not have to separate the after tax money because you cannot take out the pre tax funds. If you are in this situation, check with your plan to see what options they offer for the after tax contributions. Often, the earnings on those contributions must also come out, but the earnings amounts are usually relatively small.
Permalink Submitted by Justin Whelan on Wed, 2011-08-03 15:31
Excellent analysis. I thank you.