rollover 401K, after tax portion, to outside ira account

Submitted by Yungti Yin on Fri, 2012-07-20 16:36

Hi, I have a question on 401K rollover> I have about $250000 in my 401K account ($60000 after tax, $190000 before tax). Do I roll the whole $250000 into my IRA acoount, or only $190000, the before tax portion ? If only the before tax portion can be rolled over, How do they (or I should) handle the $60000 after tax portion. Thanks.



Submitted by mk foss on Fri, 2012-07-20 18:50

You can rollover the entire amount to an IRA – then the $60,000 will become basis in the IRA to be withdrawn pro-rata when distributions are made.

You can also withdraw the entire balance and roll $190,000 into an IRA within 60 days – if you do that, the plan will withhold 20% federal tax from the pre-tax portion of the benefit.

It used to be easy to roll over the pre-tax and take out the after-tax, but since 2009 the IRS has indicated that part of the $60,000 would be taxable.



Submitted by Yungti Yin on Fri, 2012-07-20 19:28

Thanks for the information, but you are saying if I take the after tax out (that $60000 not rollover to IRA), I will have to pay tax (after 2009). Then I don’t pay tax if I roll that $60000 into my IRA account, and no tax even when I withdrawn later. (sounds a little strange here)



Submitted by Alan Spross on Fri, 2012-07-20 20:12

If you want to preserve the entire balance in your IRAs, you should consider the following strategy to avoid the IRS pro rating rules and get the after tax amount into a Roth IRA:
1) Request the full distribution be paid to you
2) You will receive $212,000 and $38,000 will be withheld as mandatory 20% withholding on the pre tax portion
3) Within 60 days roll 190,000 into your traditional IRA
4) Immediately thereafter roll $60,000 into a Roth IRA, but you must come up with the $38,000 to complete this rollover.

The result is that the distribution will be tax free and the 60,000 will go to your Roth IRA where it will grow tax free. You get the 38,000 refunded when you file your 2012 return.

If coming up with that money is a problem, you could reduce any current withholding or estimated tax payments right away knowing that the IRS will get 38,000. Postpone the distribution until December when you can file your return within a few weeks and get the tax refund. You have 60 days to complete the rollovers so you could take the distribution in mid December and would not have to complete the rollovers until mid February. You might be able to get your refund with just a couple weeks after that.

Having the after tax money go to your Roth IRA is much more tax efficient than having it go to your TIRA where it will be subject to the pro rate rules where a small portion of your distributions will be tax free for the rest of your life. Meanwhile any earnings in your TIRA on this money will eventually be taxable. It is worth the effort to do this unless you need the after tax money for expenses.



Submitted by Ronald L. Geer Jr. on Thu, 2013-08-08 17:00

Alan, if the custodian on the 401k will distribute 2 checks, one pre tax and one post tax, as a direct rollover, can the post tax roll to a roth IRA and pre tax roll to a TIRA without the 20% withholding strategy?-Ron



Submitted by Yungti Yin on Fri, 2012-07-20 21:56

Thanks a lot, I need to think about this Roth IRA method. And a little hard to come up $38000. but I’ll try to do that if I can. Thanks again.



Submitted by Yungti Yin on Sun, 2012-07-22 01:39

I have been thinking about the above Roth IRA method. I have a couple of follow up questions: WHy can I ask my 401K admtr to roll $190000 to my rollover IRA account, and roll the other $60000 to my roth iRA account at the same time? Second question: Can I rollover all $250000 to my rollover IRA account, then immediately I move the $60000 to my roth IRA account ?/



Submitted by fairira on Mon, 2012-07-23 18:51

Alan, re your 7/20/12 post:

If the full distribution (with 20% withholding on the pretax part) is taken in December 2012 and the rollovers are done within 60 days in February 2013, what codes and/or explanations should appear on the 1099-R and Form 5498’s issued in 2013?

Thank you.



Submitted by Alan Spross on Mon, 2012-07-23 19:20

[quote=”[email protected]“]Alan, re your 7/20/12 post:

If the full distribution (with 20% withholding on the pretax part) is taken in December 2012 and the rollovers are done within 60 days in February 2013, what codes and/or explanations should appear on the 1099-R and Form 5498’s issued in 2013?

Thank you.[/quote]

The 1099R for 2012 would just show an early or normal distribution (Code 1 or 7 depending on age), would show the taxable amount in 2a and the 20% withholding on that amount.
Taxpayer would report a line 16a and 16b rollover on Form 1040.
There would be no 5498 for 2012 because the rollovers were not received in 2012. The rollovers would be shown on a 2013 5498 for the TIRA and Roth. Because of this, taxpayer should include an explanatory statement with the 2012 return that the reported rollovers were completed within 60 days on xx/xx/2013.

Completing the rollovers in 2012 would obviously result in a reduced chance of IRS inquiry since there would be 5498 forms adding up to the 1099R amount.



Submitted by Alan Spross on Mon, 2012-07-23 19:41

[quote=”[email protected]“]I have been thinking about the above Roth IRA method. I have a couple of follow up questions: WHy can I ask my 401K admtr to roll $190000 to my rollover IRA account, and roll the other $60000 to my roth iRA account at the same time? Second question: Can I rollover all $250000 to my rollover IRA account, then immediately I move the $60000 to my roth IRA account ?/[/quote]

You could ask the plan to do two rollovers if they will agree NOT to show any taxable amount in Box 2a and show the after tax amount in Box 5. You would then have a 1099R that the IRS would be less likely to question and taxpayers have been doing this successfully for a couple years now. However, the IRS could change the 1099R reporting at any time or could possibly question people who did both a TIRA and Roth rollover in the same year with respect to pro rating of the after tax amount. In other words, this is a slight gamble that could blow up.

Second question – NO, you cannot roll the full amount to your TIRA. Once after tax amounts (60k) are deposited in a TIRA account for even one minute, the pro rate rules per FOrm 8606 are triggered. If you converted the 60k to your Roth IRA, 190/250 would be taxable. That would be 45,600 taxable for the conversion and 45,600 of basis would remain in your TIRA. Only 14,400 of your basis would go to the Roth IRA when your goal is to get all 60k in the Roth IRA.

In summary, your second question would not work at all. The first question could work, but there is risk that it may not.
One thing you might consider if you want to try the two direct rollovers is to wait until November or so before acting. By November it is too late for the IRS to revamp the 1099R reporting for qualified plans for 2012. There is still some risk, but waiting until November so that it is too late for the IRS to release new guidance will reduce that risk.



Submitted by Yungti Yin on Mon, 2012-07-23 21:09

Alan, Thanks a lot, I’ll try to come up the money and do the indirect rollover.



Submitted by Yungti Yin on Tue, 2012-07-24 21:11

I have an income tax related question. I am not very clear the TAX form 16a and 16b that you mentioned above in this 401k rollover (don’t I have to pay tax if I put some thing on 16b ?). If I do the indirect rollover mentioned above (I received check, then put the pre-tax in my rollover IRA account, and come up some money and then put after-tax in my Roth IRA account all within 60 days). How do I do my income TAX next April for this 401k rollover? Thanks.



Submitted by Alan Spross on Tue, 2012-07-24 21:45

16a would show the full amount distributed on the 1099R. 16b would show -0- and “rollover” entered on the line next to 16b.

You would also need to enter the withholding amount shown on the 1099R on the Payments line on p 2 of Form 1040. The line # was 62 on the 2012 1040.



Submitted by Yungti Yin on Wed, 2012-07-25 02:24

I see, Thanks.



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