In-service 401k withdrawal with Basis to a Roth
How can an employee take an in-service 401k withdrawal where there is basis and roll the basis into a Roth IRA? The participant is still employed at the same employer and wishes to keep his 401k account open. Has anyone tried the following strategy: 1) roll the entire 401k into a rollover IRA. 2) maintain the basis portion in the IRA. 3) roll the non-basis portion back into the 401k with the employer. 4) convert the 100% basis IRA into a Roth.
Permalink Submitted by Alan Spross on Tue, 2012-01-31 23:52
This will almost never work with the same current employer, at least with respect to employee deferrals prior to age 59.5. More likely, the employee may be allowed to roll out the after tax amounts usually with earnings on the after tax amounts. If the earnings are relatively small, the entire amount could be rolled directly from the plan to the Roth IRA, with only the earnings being taxable. It may be rare to have a plan that will allow the rollover to a TIRA and then accept the earnings amount back. Also, any strategy using a TIRA as part of the process will result in any conversion being pro rated over all the employee’s TIRA values. So if there are other TIRA accounts, the pre tax balance of those accounts would have to be rolled into the employer plan to avoid any conversion being mostly taxable.