After tax portion of 407k rollover
How does one deal with the after tax portion of a 401k rollover? Can this amount be used to create a Roth IRA? Are there dollar amount limits? The amount of after tax contributions to the 401k are over $40k.
How does one deal with the after tax portion of a 401k rollover? Can this amount be used to create a Roth IRA? Are there dollar amount limits? The amount of after tax contributions to the 401k are over $40k.
Permalink Submitted by Alan Spross on Fri, 2008-06-20 17:57
Prior to this year, the employee had a choice between taking the after tax amount as tax free cash or rolling it into an IRA and filing Form 8606 to document the added basis of the IRA.
However, under the PPA, a direct Roth conversion can be done starting this year. These funds to not have to get to the Roth through a TIRA and can be transferred directly to a Roth IRA. The 100,000 income limits apply to all conversion methods until 2010. What has not been fully clarified by the IRS is whether the pre tax portion can be transferred to a TIRA and the after tax portion to a Roth IRA. There is no particular reason this cannot be done, but an employer plan does not have to offer multiple transfer destinations. For someone with 40k of after tax contributions, it is worth waiting to determine if this can be done, and in order to get the after tax funds to a Roth faster with the least amount of conversion taxes, it may even be worth waiting another 18 months until 2010 if the income limit prevents earlier conversion.
If the after tax contributions include pre 1987 amounts, it may also be possible to transfer them FIRST to the Roth, again subject to the income limits.