After tax contributions prorated?
If a PARTIAL distribution of $153,893 is made from a total $538,772 IBM 401k, and the entire distribution is converted to a direct rollover new ROTH IRA, can this rollover include the ENTIRE AFTER TAX contibutions in the 401k of $37,893 in this first distribution, or MUST they be prorated leaving some after tax in the 401k for future distribuions? Owned also are ROTH IRAs and an IBM Personal Pension Account, but there are NO traditional IRAs, other 401ks, 401k ROTHs or company stocks in the 401k.
Permalink Submitted by Alan Spross on Tue, 2012-03-27 16:26
Pro rating applies with the following exceptions:
1) Any pre 1987 after tax contributions can be distributed separately
2) If the employee is still working, and the plan only allows the employee to distribute certain portions of the plan (ie does not allow pre tax deferrals to be distributed until later or separation), then the pro rating only applies to the portions eligible for distribution.
Another consideration is using “isolation of basis” strategies to get the after tax contributions into a Roth IRA and the pre tax amount to a TIRA. There would be no tax due in that situation, but there are some gray areas due to lack of IRS clarity when doing this. Converting a mostly taxable amount of 154k may inflate the marginal tax bracket.