After Tax 401k to a ROTH?
What are the rules for rolling over after tax money from a 401k to a ROTH?
scenario: $180k 401k balance, of which $102k is after-tax
Can the after tax be placed in a ROTH, & the pre tax go into a traditional IRA via a direct rollover?
Can the plan administrator send 1 check, and the pre tax go into a TIRA & the after tax go into a ROTH?
I’m looking for a way to avoid the indirect rollover situation, which requires the 20% mandatory withholding, then splitting the money, and having to then make up the 20% & wait on a refund.
thank you…
Permalink Submitted by Alan - IRA critic on Fri, 2014-03-14 00:45
Isolation of basis in dolng rollovers does not sync well with existing rules. The intent of the IRS is to have all basis pro rated between the TIRA and the Roth IRA rollovers (Notice 2009-68). However, this Notice has not been supported with corresponding 1099R reporting provisions and it also conflicts with Sec 402(c)(2) regarding the mechanics of indirect rollovers. Because of this section, the method you are trying to avoid is the safest with respect to the IRS challenging the isolation of basis to the Roth IRA. That said, tandem direct rollovers have been going on for 4 years now without consequence as long as the plan issued 1099R conforms as most do. Doing this rollovers late in the year after it is too late for the IRS to alter the 1099R reporting procedures for the current year is safer if a taxpayer wants to avoid the 20% withholding safer method and use tandem rollovers. Meanwhile, the actual rules remain conflicted.
Permalink Submitted by J LEWIS on Fri, 2014-03-14 02:00
It sounds as though there is no clear approval in doing “tandem direct rollovers”, although many have been done. i’m unsure on how the plan will report it on the 1099R.Assuming the direct rollver is distributed as 1 check, is there an advantage to splitting the pre & after tax proceeds into 2 separate Tradtional IRA’s? One being all pre-tax, the other being after tax….with the thinking that at least the growth of the after tax TIRA would be tax deferred.Wouldn’t the after tax TIRA require filing form 8086 to provide tracking of the after tax amount? What do most people in this scenario do? Just have the after tax $ distributed to themself, & do a direct rollover of pre tax?
Permalink Submitted by Alan - IRA critic on Fri, 2014-03-14 03:18
Some do as you stated last. Creating two different TIRA accounts will not do any good because all TIRA accounts are considered as one combined account for tax purposes, and it would also put the after tax money into a TIRA which would torpedo the possibility of isolation.
Permalink Submitted by J LEWIS on Fri, 2014-03-14 17:44
I suppose then, the only option, seeing that 1 check has been requested, is to condsider whether it’s worth the chance of executing what you referred to as a tandem direct rollover, split the funds between TIRA & ROTH, and hope the 1099R is reported in such a way no red flags come up with the IRS.bThe only other option, would be to return the check to the plan, & request the after tax be paid to the participant, and roll pre tax to TIRA.There’s no good solution without having to come up with the 20% mandatory withholding.