Multiple 401k Rollovers with Nontaxable balances
I have a client who wants to rollover multiple 401(k)s, each with Nontaxable balances. I am of the understanding that we can roll these balances into the client’s Roth IRA. The custodians of these 401(k)s won’t issue the checks to our “Custodian FBO Our Client”. They will only issue the checks to the client in the client’s name. In order to deposit these checks with our custodian, our two options are 1) Direct Rollover or 2) 60-Day rollover. Is there a way to get these checks deposited into the Roth IRA without triggering the once-a-year-only rule as it applies to 60-Day rollovers? Will the IRS penalize the client or make him back out any deposits greater than 1?
Permalink Submitted by Alan - IRA critic on Wed, 2024-02-28 16:37
There is no one rollover limitation if a qualified plan (401k) is on either end of the distribution, so the number of checks is not a problem. Normally, if a 401k holds an after tax balance and a pre tax balance a split direct rollover is requested, sending the pre tax balance to a TIRA and the after tax balance to a Roth IRA. A 401k plan is required to provide at least one direct rollover, although most of them will do more. For those that refuse to do more than one, the pre tax to TIRA would be the direct rollover and a check made out personally to the client of the after tax amounts would be sent, and client could then do a 60 day rollover of that amount to the Roth IRA.
A major problem with these custodians refusal to do at least one direct rollover is that there will be a mandatory 20% withholding of the pre tax distributions, forcing the client to replace the withholding using other funds (which they may not have).
If there is any pre tax money in these plans, rolling that to a Roth IRA will be taxable. It’s rare for a plan not to have pre tax dollars in it.
Permalink Submitted by David Mertz on Wed, 2024-02-28 19:12
More accurately, a 401(k) plan is required to offer to perform a direct rollover of any distribution that includes a taxable amount. If the distribution consists entirely of after-tax funds, no offer to perform a direct rollover is required. Because there is no tax withholding required on a distribution that is entirely nontaxable, there is no real downside to the check being made out to the client instead of to the IRA custodian FBO the client other than that the indirect rollover must be completed within 60 days and that the client will typically need cash the check and make the separate rollover deposit since the IRA custodian will often not accept a third-party check.