How to handle a 401k transfer to a R/O IRA

Submitted by Jeff Watkins on Wed, 2012-10-10 18:11

I am retired and have a company 401k that contains both pre-tax and after-tax money. I am considering transferring the 401k to a R/O-IRA. I have records showing the pre- and after- tax amounts made over the years. Will such a transfer cause me any tax problems? Can I combine the 401k with an existing T-IRA? Do I have to file any paperwork with the IRS when I make the transfer? Will the percentage of pre-tax contributions in the 401k that I transfer apply to all of my T-IRAs and R/O-IRAs when I start taking RMDs?
Many thanks!
ri096a



Submitted by Alan Spross on Wed, 2012-10-10 20:53

If the after tax contributions amount in your 401k is significant, you may want to consider how to get the pre tax amount to a rollover TIRA and the post tax amount to a Roth IRA. That’s a little tricky due to lack of IRS clarification with respect to pro rating such distributions.

But for now, will just address your question.
If you are in a state (eg CA) that does not protect IRAs from creditors AND if your total IRA balance will exceed 1,000,000, then you should keep your rollover TIRAs separate from your contributary IRAs and not combine them. A rollover IRA has unlimited dollar protection but non rollover IRAs are limited to 1,000,000 plus inflation. If this does not matter to you because your state fully protects IRA accounts, then you can combine them.

If you roll the after tax amount into your IRA, then you will have to file Form 8606 to report that basis. When you take distributions including RMDs, Form 8606 will also be needed to calculate the pro rate amount that will not be taxable. You do not file the 8606 reporting the after tax rollover amount until you otherwise would need one, and that might be for the year you take your first RMD.

However, if you roll the after tax amount to a Roth IRA, you will avoid RMDs and you will avoid having basis in your TIRA account that will result in pro rating taxable amounts for RMDs the rest of your life.

Or. you could just take the after tax amount and put in your taxable savings or brokerage account instead of rolling it into either type of IRA.

This covers alot of subjects, so if you have further questions, please advise.



Submitted by Carol Novak on Tue, 2012-10-16 01:12

Just to clarify – if he rolls the after tax contributions into a Roth IRA, he should do so using an indirect rollover of the entire 401K? In this case, he will have to make up the 20% withholding that the plan administrator will withhold. He would later get that back when he files his tax return. But, in the meantime, my understanding is that the cleanest way to roll the after-tax contributions to the Roth is to do an indirect rollover – depositing the after tax contributions into a Roth and the pre-tax (including earnings on the after-tax) plus the 20% withheld into an IRA. Is this correct? And, how should he report this on his tax return? Thanks!



Submitted by Alan Spross on Tue, 2012-10-16 03:51

Yes, you are correct.

I thought about going through all that, but with lack of IRS guidance and the 20% withholding pitfall, thought I’d wait for a response. The mandatory withholding can require a large chunk of cash to come up with before receiving the tax refund. But it’s the only sure and safe way to effectively isolate basis to the Roth IRA without risking IRS intervention or revised guidance with respect to the 1099R.

Someone going this route would report the total 401k distribution on line 16a of Form 1040, with nothing on 16b and “rollover” entered on the line next to 16b. Obviously, the withholding should also be reported on p 2 of the 1040.

Under Sec 402(c)(2), when a distribution is made to the employee and the employee does indirect rollovers, the first dollars rolled over are considered to be the taxable amount (the pre tax amount). Therefore, the pre tax amount must first be rolled to the TIRA and after it is recorded in the account, the remaining after tax amount goes to the Roth IRA. The withholding must be replaced to complete these rollovers.



Submitted by Don Martin on Wed, 2013-01-30 18:43

When transferring a 401k to an IRA where the 401k has both pre-tax and post-tax contributions should the taxpayer segregate his post-tax contributions by transfering them to a separate tradtional non-deductible IRA or simply dump the all 401k funds into the same rollover IRA that contains both the pre-tax 401k contributions and post-tax contributions and file form 8606?



Submitted by Alan - IRA critic on Wed, 2013-01-30 21:42

  • If the post tax amount is significant, the best approach is to isolate the basis such that the pre tax is rolled to a TIRA and the post tax amount to a Roth IRA. There is a way to do that, but it requires a distribution of the entire balance to the employee who then must replace the 20% withholding and do his own rollovers, TIRA first and Roth last. See my prior post in this thread about this.
  • If the post tax amount is not significant enough to do that, the entire balance can be directly rolled to a TIRA, and Form 8606 completed to record the post tax basis in the IRA (line 2 of the next 8606 otherwise issued). There is no benefit of putting the pre and post tax amounts in different TIRA accounts.
  • Or the old method can still be used, ie have the pre tax amount rolled to a TIRA in a direct rollover and a separate check for the post tax cash made out to the employee who uses that for taxable savings or expenses.


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