401K rollover includes after tax proceeds-Roth Conversion?
My client has an existing IRA which will receive pre-tax 401K rollover proceeds, and an
existing ROTH IRA which is eligible to receive after tax rollover proceeds from the 401K.
We have received conflicting advice on how to process the after tax portion of the rollover to the ROTH IRA. Would a Letter of Instructions to the trustee of the 401K be sufficient in addition to the rollover forms?
Permalink Submitted by Alan - IRA critic on Thu, 2014-09-04 16:32
Have client tell the trustee what is desired, and if they want written instructions, client can provide that. There are several different ways to “isolate basis” when doing rollovers, and some are riskier than others. Is client separated from service?
Permalink Submitted by John L. Ostner on Thu, 2014-09-04 18:46
Yes, client is separated from service. It sounds as if Letter of Instructions to the trustee might work best. Agree?
Permalink Submitted by Alan - IRA critic on Thu, 2014-09-04 23:16
Yes, if their form does not include the option desired. If client wants to use a safer method of isolating basis, and is working for a new employer whose plan will accept rollovers from IRA. he could roll the entire balance to a TIRA, then roll the pre tax amount of all his non ROth IRAs into the new employer plan. That would allow him to convert the remaining IRA basis tax free to a Roth IRA. Another fairly safe method if he can afford to replace withholding is to have the balance distributed to him personally, then roll the pre tax amount to a TIRA and the after tax amount to a Roth. But he will have to replace the 20% withholding on the pre tax amount to complete these rollovers. A more risky method that is the easiest would entail the old plan being willing to do a direct rollover of the pre tax amount to a TIRA and the post tax amount directly to a Roth IRA. Many plans will do this, some will not.