After-Tax IRA Contributions Treatment During a Conversion.
Well I have a few questions here all relating to after-tax contributions.
Situation 1: I have a client with $85,000 of after-tax contributions in his 401(k). His and wife’s income is $125,000. His 401(k) allows an in-service distribution of after-tax contributions. The PPA allows for a conversion of 401(k) directly to a roth. Is it possible to convert the after-tax monies to a roth so that he could get all $85,000 directly into a tax-free environment? I think not, but it’s worth a thought.
Situation 2: I have a client with non-deductible IRA accounts. They total about 75,000 and are about 50% conts and 50% earnings. If his income allowed him to do so (or when there are no income limitations) to convert to a Roth, could this be done? How would it work?
Any help, clarification, ideas, would be helpful.
Aaron
Permalink Submitted by Alan Spross on Thu, 2007-09-27 22:33
Situation 1: It might be possible, but the complete Regs for the 401k to Roth transfer are not out yet. These are not available until 2008. There are many issues to be resolved, such as how recharacterization would be handled if employee exceeds the 100,000 income limit that applies until 2010. However, it would be wise to check if the permitted distribution is only for pre 1987 after tax amounts or not, because all permitted distributions of other amounts in the plan should be pro rated between post tax and pre tax amounts. So that should be checked out. But the portion of the distribution that actually is after tax would not be taxable in such a direct conversion.
Situation 2: Yes, if that’s the breakdown on all his IRAs and 50% represents non deductible contributions, then 50% of any distribution or conversion will be tax free. The calculation and the reporting of this is on Form 8606, Parts I and/or II.
For the direct conversion next year, it may take awhile for the plans to digest the reporting and system support issues needed to offer the conversion. That would be after the IRS gets around to issuing instructions.