Post tax dollars 401K rollover question
I have a client with a $300K 401K that we are rolling over, $10K of which is post tax dollars and will come in a separate check made payable to him. Can we convert that $10K to a ROTH with zero tax consequence, or should we just treat it as a separate traditional IRRA for $10K?
Permalink Submitted by Alan Spross on Mon, 2011-10-17 19:30
You are probably doing the rollover directly to avoid withholding, and that will produce two 1099R forms, one for the direct rollover and the other for the 10k. The client can roll the 10k to a Roth IRA, and it will probably result in a tax free Roth conversion because the IRS has not changed the way the plan issues the 1099R forms. The IRS will like to require the after tax 10k to be pro rated to each IRA type (Notices 2009-68 and 2009-75), but current reporting has allowed the basis to remain separate for the last two years, and the 2011 1099R Inst. have not changed anything.
So client could probably pull this off because the time left for the IRS to alter 2011 reporting is about gone. Those waiting until next year might run into a different situation as that starts an entirely new reporting cycle.
Worst case scenario is that the conversion would turn out to be mostly all taxable, but if client wanted to avoid those taxes, the conversion could be recharacterized to a TIRA. The 10k of basis would be reported on Form 8606 for the TIRA to avoid eventual double taxation. What would be lost is the ability to get the 10k out of the TIRA except prorated over client’s lifetime.
The chances of this happening for 2011 rollovers is very slim.