rollover 401(k) after-tax contributions
WE have a client who wants to roll over his 401(k) to an IRA.
The 401(k) has pretax and after-tax contributions.
Is there any way to transfer the pieces of the 401(k) into separate IRAs to maintain the pre tax and after tax nature of the contributions.
(I think the answer is no, every distribution will have a nontaxable aspect to it regardless of what account it comes from.)
Thank you,
Permalink Submitted by Greg Henson on Mon, 2012-05-14 20:31
Yes. Most recordkeepers will ask your client if they want to roll the pretax contributions, as well as the after tax earnings, into a traditional IRA. At that point, the rep should also ask if the after tax should be comingled or sent to your client as a check. Do not comingle.
Permalink Submitted by Alan Spross on Mon, 2012-05-14 21:07
If the client wants to isolate the basis in the plan to different IRA types, the only safe way to do that is by indirect rollover and replacing the 20% withholding. That will avoid the prospect of the IRS requiring that the basis be pro rated to both types of IRAs. Direct rollovers may not work as they are subject to IRS rulings with respect to pro rating.
Using the indirect rollover method:
1) Request the check be made out to the client
2) Client receives check less 20% withholding on the pre tax amount
3) Client then rolls the full pre tax amount to a TIRA account
4) Client lastly rolls the after tax amount replacing the withheld amount as necessary to a Roth IRA.
This is protected by Sec 402(c)(2) of the tax code which indicates that amounts distributed to the taxpayer and rolled over are deemed to come first from the pre tax amount. This is why the TIRA rollover is done first.
While the entire 401k can be directly rolled into a TIRA or different TIRAs and Form 8606 filed to report the basis, a Roth is much more beneficial since it will grow tax free and there will be no RMDs.
Permalink Submitted by Denise Appleby on Mon, 2012-05-14 21:51
It seems the OP was referring only to traditional IRAs, in which case, he/she correctly answered hi/hers question himself when he/she said[quote] “I think the answer is no, every distribution will have a nontaxable aspect to it regardless of what account it comes from.” .[/quote]