After Tax 401(k) money direct rollover to a Roth?
I was recently let go of from my job of 27 years. My 401(K) has about $650,000 in it, with $15,000 being after tax money. When I called Vanguard. they suggested that I rollover my pretax contributions, but said I should roll my after tax contributions directly into a Roth IRA. I had not heard that was possible. So here are my three questions:
1. Can after tax 401K contributions be rolled directly into a Roth IRA?
2. Would the growth on those contributions be rolled into the Traditional IRA?
3. Would taking out the after tax contributions trigger tax on the growth even if it is rolled over?
By the way, this plan has been around since the mid-eighties – I believe I heard somewhere that older plans have different rules.
Permalink Submitted by Alan Spross on Mon, 2007-10-29 19:48
1) They can after the first of the year, however the IRS has still not released Regulations explaining full details. Since any distributions other than pre 1987 after tax contributions must come out pro rated, you should defer the pre tax transfer to early next year after the Regs are issued. At that time you should be able to transfer to pre tax to a TIRA and the 15,000 to a Roth IRA.
2) Yes, the growth is part of your pre tax balance.
3) No. Whether you took the 15,000 in cash, rolled it to a TIRA, or waited for the direct Roth transfer, the growth would not be taxed if transferred to a TIRA.
With respect to older plans, what you refer to is probably the pre 1987 after tax contributions, which can come out separately without being pro rated. If your plan tracks them, that amount should show up separately on your annual or even interim statements.
Finally, since you have been there 27 years, you may have highly appreciated employer stock shares which may be candidates for NUA. Under NUA, the shares are transferred to a taxable account, and you are taxed on the cost basis at the time, but all the gains are not taxed until you sell the shares, and then at the lower LT cap gain rates. You should get a cost basis quote from the plan before formulating a total rollover strategy.
When you are dealing with the combination of after tax contributions, NUA, and lump sum distributions, things get real complex.
Permalink Submitted by Edward Czapor on Tue, 2007-10-30 02:51
Alan, could not a pre 1987 after tax amount be rolled over first now to a TIRA and then converted to a Roth prior to rolling over the pre tax balance to avoid pro rata taxation with that amount. If so, would you have to do a direct to Roth rollover of the after tax amount first also in 2008?
Ed C
Permalink Submitted by Alan Spross on Tue, 2007-10-30 04:03
Ed,
Yes, any pre 1987 separately accounted for after tax contributions could be rolled to a TIRA and an 8606 filed, but if there are other TIRA assets the pro rata rules would apply to the conversion. If there are no existing TIRA accounts, this would work. However, it could blow NUA possibilities as an intervening distribution if the entire LSD was not completed this year. An intervening distribution does not have to be taxable.
Since the Regs are not out for the direct Roth rollover starting next year, the mechanics are not clear. At least one tax authority seems sure that ANY after tax amounts will be able to go straight to the Roth as long as the pre tax amounts are distributed at the same time. This would put the post 1986 after tax amounts on par with the pre 1987 amounts, enabling the total 15,000 to go into the Roth.
One of the real needs for Regs on this will be the recharacterization procedures if a taxpayer converted and his MAGI turned out to be over 100,000. So I think we need to wait for the Regs on this, which need to get issued soon so employer will know the rules. Until they do, they probably will not process any direct Roth transfers. I think Vanguard is jumping the gun somewhat here, but perhaps they are privy to advance information on this.