401k Rollover (In service)
An active employee at a company over 60 years of age is considering rolling over a portion of their retirement plan to an IRA.
Has both pre and post tax contributions to the plan which the administrator said will be rolled over pro-rata based upon the total amount transferred. The after tax account has a cost basis of $250K and growth of $80K. Of which the client states the $250K can be sent to their non-qualified investment account and $80K will be rolled over to the IRA in addition to the pre-tax “bucket” from the 401(k).
Is there a more efficient way to move the money now and for future tax savings? Is there a strategy that can be used so the gain in the post tax 401(k) can be taxed as a capital gain rather than rolling over to an IRA and paying ordinary income in the future.
Permalink Submitted by Alan - IRA critic on Wed, 2021-10-20 20:36
Normally in a split rollover the after tax balance (250k) is directly rolled to a Roth IRA, but employee could also have the 250k distributed to themself, keep whatever is needed in the very near future for spending, and roll the rest to the Roth IRA within 60 days. The pre tax balance goes to a rollover TIRA.
The only way to achieve cap gains treatment is to wait until retirement and if there is appreciated employer shares in the plan eligible for NUA, those shares could be distributed to the brokerage account, and when they are eventually sold, the lower LTCG rates would apply to the appreciation. Distribution of the shares from the plan would have to be part of a qualified lump sum distribution of the entire plan balance, using retirement as the triggering event for the distribution. NUA is typically not beneficial unless the cost basis of the shares is under 25-30% of their current value.
Combining a lump sum distribution with NUA and a split rollover of other plan assets when there are after tax contributions is complex and must be very carefully planned.