After-tax 401k to Roth IRA

Submitted by David Mitchell on Sat, 2015-05-30 20:18

Hi,
A client of mine age 67, retired from this employer (401k custodian Fidelity) states that after calling Fidelity, they will not let him roll over his plan in more than one check. He has balances in these money types: “Before Tax” “After Tax” “After Tax Unmatched” “Company Match” and “Rollover”, and later in the 401k statement shows both pre-87 and post-86 cost basis.
Obviously we would like to move the post-tax basis directly rolled over into a Roth IRA. I understand that the recent guidance suggests that he could do this, but it would have to be at the same time as the issuance of the pre-tax check as well (2 checks total, one to Roth, one to TIRA).
To compound things, he does have sizeable IRAs outside of his employer’s 401k custodian and has had IRA non-deductible basis as well. However, he is retired, and I’m not sure that the custodian will let him roll in the pre-tax into his 401k being that he is no longer employed. But, the account at the 401k is sizeable, approx. $1 million.
Can anyone (Alan?) provide a little feedback as to the first question about directly rolling the post- to a Roth and the pre- to an TIRA, as well as feedback on the viability of attempting to separate the pre-tax IRA amounts from the TIRAs back into his 401k first, then converting the IRA basis to Roth, then, moving the pre-tax back out into TIRAs (and post-tax 401k into Roth).
Any major issues I may need to be concerned about with these two different strategies, esp regarding timing, tax reporting, etc.?
Thank you very much in advance.



Submitted by Alan - IRA critic on Sun, 2015-05-31 03:26

  • It is rare that a plan would not offer the two check distribution per Notice 2014-54, rare enough to warrant rechecking the accuracy of this information. Most plans will not accept IRA rollovers for former employees, but that could be checked out as well. If the current feedback is correct, perhaps the plan will make the change next year and if this is likely to happen, it may be worth delaying the rollovers until next year.
  • I assume that a million dollar plan will have too high a pre tax balance for the employee to front the 20% withholding. If the employee has that much on hand, he could simply have the single check distributed to him, then do the pre tax rollover first and the after tax second. He would then recover the huge withholding bill when he files his 2015 return. This would solve the problem, but he probably does not have this much liquidity.
  • If prospects are decent that the two checks would be issued next year, he could wait until next year. He might also be able to get a check for the pre 87 after tax amount this year and roll it over to his Roth.
  • He is probably stuck with his commingled IRA basis, but if his after tax contributions in the plan are large, he might want to keep the balance there for a couple years in the expectation that the plan would update their rules.

 



Submitted by David Mitchell on Tue, 2015-06-02 12:09

thank you. If it seems like the plan is willing to take an incoming IRA rollover for this former participant / employee, what is the correct method for extracting the after-tax basis from his traditional IRAS when the TIRAS and the qualified plan has after tax dollars within them both?



Submitted by Alan - IRA critic on Tue, 2015-06-02 17:50

A qualified plan is only allowed to accept pre tax dollars in an IRA rollover. Therefore, the taxpayer can either first convert the basis of the IRA as would be indicated on Form 8606 and then roll the entire remaining TIRA balance into the employer plan, or can do the rollover first being sure to leave the basis behind in the IRA. That basis can then be converted tax free afterward. Note that all owned TIRA accounts are combined in considering how much basis there is. The first dollars rolled to an employer plan are automatically considered to be the pre tax dollars in the TIRA.



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