Can I Move Money From My Pre-Tax 401(k) to a Post-Tax Account?

By Sarah Brenner and Beverly DeVeny
Follow Us On Twitter: @theslottreport

Intricate questions to kick off the new year. One consumer has a question about moving pre-tax money to post-tax accounts, while another is getting conflicting answers about utilizing his IRA for ministry housing. Finally, we answer a question on what’s sure to be a popular topic in 2016, the tax reporting of hard-to-value IRA assets. As always, we stress the importance of working with a competent, educated financial advisor to keep your retirement nest egg safe and secure. Find one in your area at this link.

1.

Good Morning,

I am a Municipal worker for the city of New York and I belong to the NYC Deferred Compensation Plan with a 457(b), 401(k) and IRA account. It is my understanding that the Taxpayer Relief Act of 2012 allows plans to convert pre-tax money to post-tax money without a distributable event. I would be interested in converting my 401(k) and 457(b) funds to an IRA and paying the tax up front for this conversion to occur. Can I do this?

Answer:
Unfortunately, the answer would be no unless you are eligible to take a distribution from your employer plan.

The law you are referring to is the American Taxpayer Relief Act (ATRA), which was signed into law on January 2, 2013. This law expanded the ability of plan participants to convert plan assets to a plan Roth account. You can now convert your plan assets to a plan Roth account at any time if your plan has adopted this option. You no longer need to able to take a distribution from the plan to do an in-plan conversion.

2.

Since you are the IRA expert, perhaps you will be able to answer this question for me: Can an IRA account be utilized for a minister’s housing allowance, or does it have to be taken from a 403[b]9 retirement account?

While I am an ordained minister, I have not utilized the services of Guidestone [GS] with the Southern Baptist Convention at this point. I was told by a stockbroker yesterday that he had moved a number of minister’s retirement accounts from Guidestone into managed fund accounts with his broker dealer, specifically into IRAs. While I told him it was my understanding that an IRA could not be utilized for housing allowance for ministers [so he had basically performed a disservice to those pastors], he said ministers could still use their IRAs for housing allowance according to the “Church Plan Document.” He went on to say the church could set up the pastor’s retirement account even with a bank and it could be utilized for housing allowance. I can tell him he is wrong, but that will have little response. He said, NO ONE has ever showed me an IRS ruling or any kind of legal document that spells out that only a 403[b]9 and not an IRA can be used for housing allowance.

Several very nice GS staff have told me by phone to check IRS section 107 and minister’s duties 1.402, 5.17, 1.56 and Ruling 7522 – but that has proven of little value. Perhaps I’m missing something obvious? Do you know of any legal IRS type doc or ruling that specifically spells out the fact that an IRA cannot or should not be used for housing allowance? Or, to what doc or ruling do you refer when you say to a minister that if he leaves GS and transfers his funds to a non-403[b]9 he will lose his housing allowance. 

As mentioned, I’ve tried to determine an answer to this question with GS phone staff. All have been very helpful, but none were able to give me any qualifying data to substantiate these statements. I would be grateful for any thoughts you may provide.

Answer:
There are no special rules for IRA distributions which are utilized for a minister’s housing allowance. Different kinds of retirement accounts are subject to different distribution rules. While special rules may apply for a minister’s housing allowance when the funds are in a 403(b) plan, that treatment would not apply once funds were rolled over to an IRA. Your situation sounds complicated and you are getting a lot of conflicting advice. You may want to consider consulting with a financial advisor with expertise in 403(b) plans for clergy to be sure you are getting all the information you need.

3.

Hello Mr Slott,

I hope you have time to answer my question. I have an inherited IRA from my Father that I set up as a self-directed IRA. I invested in two closely held LLCs and also entered into a promissory note agreement with one the two LLCs. Both of these LLCs are no longer going concerns and for one of these, the Manager cannot be located.

My IRA Custodian states on their FMV (fair market value) form that if an asset is to be valued at 0, it requires a letter from the Corporation, CPA or attorney stating the asset is worthless.

Do I have any recourse if I cannot locate one of the 3 aforementioned parties to value the asset to 0?

Thanks for your website. You may have answered this question there already, so I apologize for being redundant.

Regards,

Steve Sell
Westcliffe, CO

Answer:
The IRS does require that all IRAs, even those with hard-to-value assets, report a fair market value for the year on IRS Form 5498. However, the IRS has not issued any specific guidance on how assets are to be valued. Your IRA custodian may have policies in place, such as what you have described, to try to value assets accurately. Valuing these assets correctly is especially important now because in 2015 the IRS has increased the reporting requirements for IRAs that contain hard-to-value assets. It is likely that such assets will receive heightened scrutiny. You will want to work with your IRA custodian as best as possible to determine the value of the assets. You might suggest alternatives to arriving at a fair valuation if you cannot locate the necessary party to comply with the IRA custodian’s request.