Roth 401(k) Rollovers
We read an article stating that in order to roll your Roth 401(k) to a Roth IRA you have to meet the $100,000 combined AGI restriction. The article referenced IRC 408A(c)(3)(B). In this instance, you couldn’t take the Roth 401(k) money out of the plan–it would have to sit in the plan until 2010 when the $100,000 limit goes away. Am I correct? Comments, please.
Permalink Submitted by Alan Spross on Wed, 2007-10-31 00:09
I think you are confusing the direct Roth conversion available next year with a designated Roth account rollover.
The first is a Roth conversion from a pre tax 401k and the income limits DO apply until 2010.
The second is not a conversion, but a transfer from a designated (employer) Roth account to a Roth IRA. The original funds are already Roth funds, so there is no conversion and no income limit.
Check that article again to see if it actually dealt with the transfer from a pre tax 401k to a Roth IRA…..
Permalink Submitted by Alan Spross on Wed, 2007-10-31 04:53
I just discovered the basis for that article you referenced. Following is a paste of a needed change to the TCA for the PPA that has yet to be incorporated. The change corrects an inadvertant conforming amendment in the PPA that goes back and applies the 100,000 income limit to Roth 401k to Roth IRA transfers. Until this is corrected, a potential problem exists for these transfers.
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Rollovers to Roth IRAs (PPA section 824, Code section 408A(c)(3)(B)).
Before the enactment of the PPA, a qualified plan distribution could not be rolled over
directly to a Roth IRA, subject to one exception described below. Instead, qualified plan
distributions could be rolled over to a traditional IRA, which could then be converted to a
Roth IRA, subject to the rule precluding conversions by taxpayers with AGI over $100,000
or by married individuals filing a separate return. (The $100,000 rule and the separate
return rule cease to apply starting in 2010.) Section 824 of the PPA modified these rules by
permitting direct rollovers from all qualified plans to Roth IRAs, subject to the $100,000
limitation and the separate return rule.
The problem arises with respect to rollovers of Roth 401(k) or 403(b) amounts to Roth
IRAs. Because such rollovers do not involve the conversion of pre-tax money to Roth
money, such rollovers were not subject to the $100,000 limitation or the separate return
rule prior to the PPA. However, a conforming change in PPA section 824 inadvertently
applied the $100,000 rule and the separate return rule to direct rollovers from Roth 401(k)
and 403(b) plans to Roth IRAs. Not only is this inconsistent with prior law, but since Roth
401(k) and 403(b) plan distributions can only be rolled over to other Roth arrangements,
application of the $100,000 rule and the separate return rule can make compliance with the
automatic rollover rules impossible in certain cicrumstances.
The $100,000 rule and the separate return rule should be made inapplicable to rollovers
from Roth 401(k) and 403(b) plans to Roth IRAs.
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