Pre & Post Tax 401k Rollover to Roth IRA

Submitted by mayur sheh on Thu, 2008-10-16 00:47

I jumped the gun a bit early based on bad advice. My PNC Bank rep. told me I can rollover my 401k to a Roth IRA. ** I have pre-tax and post-tax in my 401k. They called me today and now tell me that it can’t be rolled into a Roth. I told them that starting in 2008, we can roll it over directly to a Roth.

can you confirm that I can do a direct rollover of the after-tax 401k into a Roth?

Is another option to transfer the pre-tax into a TIRA and after tax into a R-IRA?

If PNC isn’t able to create both a TIRA (for the pre-tax rollover) and a Roth IRA (for the post-tax rollover), what should I do?



Submitted by Alan Spross on Thu, 2008-10-16 01:05

Transfer the pre tax amount by direct rollover to a TIRA. Have the plan issue you a check for the after tax amount and roll it over yourself to your Roth IRA. Form 8606 does not apply because you are not converting through the TIRA. There would be no current tax due based on these contributions. Note, however, that the 100,000 MAGI limit does apply and you must not exceed that or you cannot convert to a Roth IRA.

See Q&A #1 in the att’d link under Sec 824:
http://www.irs.gov/pub/irs-drop/n-08-30.pdf



Submitted by mayur sheh on Thu, 2008-10-16 02:10

Thanks.

1) PNC Bank has already received the rollover check and I am meeting them tomorrow. Should I tell them to take X amount (the after tax portion) and tell them we should be able to (as of 2008) transfer that amount to a Roth IRA?

2) If/once I transfer this into the Roth, is the income (e.g. interest income) taxable? I am assuming not, since it’s a Roth.

Thank you for your help!



Submitted by Alan Spross on Thu, 2008-10-16 02:43

I did not realize that they already have the check in hand. At this point, if you are sure you are income eligible (under 100,000 modified AGI), try to convince them to open a Roth for the post tax portion of the funds. You may need a copy of your latest statement from the plan to show them how much of the total is post tax.

The only Notice the IRS has issued on this so far is 2008-30 per my prior post. After this post is a copy of Sec 824 of the Pension Protection Act that authorizes these transfers effective this year. Give them a few days to look into this. If they still refuse, there are 3 other options:

1) Call the 401k plan and see if they will reissue in two checks, with the after tax portion paid directly to you. You can then roll it to a Roth with a different IRA custodian than PNC.
2) Settle for having the full balance contributed to a TIRA, and file Form 8606 to report the added after tax basis in your TIRA. You can convert from there, but the conversion will be mostly taxable based on the pro rate balance in your IRA between post tax and pre tax. This is definitely not as tax efficient as having the post tax portion go directly to the Roth according to Sec 824 of the PPA.

Sec 824:
[PPA] SEC. 824. ALLOW DIRECT ROLLOVERS FROM RETIREMENT PLANS TO ROTH IRAS.

[PPA §824] (a) In General- Subsection (e) of section 408A of the Internal Revenue Code of 1986 (defining qualified rollover contribution) is amended to read as follows:

`(e) Qualified Rollover Contribution- For purposes of this section, the term `qualified rollover contribution’ means a rollover contribution–

`(1) to a Roth IRA from another such account,

`(2) from an eligible retirement plan, but only if–

`(A) in the case of an individual retirement plan, such rollover contribution meets the requirements of section 408(d)(3), and

`(B) in the case of any eligible retirement plan (as defined in section 402(c)(8)(B) other than clauses (i) and (ii) thereof), such rollover contribution meets the requirements of section 402(c), 403(b)(8), or 457(e)(16), as applicable.

For purposes of section 408(d)(3)(B), there shall be disregarded any qualified rollover contribution from an individual retirement plan (other than a Roth IRA) to a Roth IRA.’.

[PPA §824] (b) Conforming Amendments-

(1) Section 408A(c)(3)(B) of such Code, as in effect before the Tax Increase Prevention and Reconciliation Act of 2005, is amended–

(A) in the text by striking `individual retirement plan’ and inserting `an eligible retirement plan (as defined by section 402(c)(8)(B))’, and

(B) in the heading by striking `IRA’ the first place it appears and inserting `ELIGIBLE RETIREMENT PLAN’.

(2) Section 408A(d)(3) of such Code is amended–

(A) in subparagraph (A), by striking `section 408(d)(3)’ inserting `sections 402(c), 403(b)(8), 408(d)(3), and 457(e)(16)’,

(B) in subparagraph (B), by striking `individual retirement plan’ and inserting `eligible retirement plan (as defined by section 402(c)(8)(B))’,

(C) in subparagraph (D), by inserting `or 6047′ after `408(i)’,

(D) in subparagraph (D), by striking `or both’ and inserting `persons subject to section 6047(d)(1), or all of the foregoing persons’, and

(E) in the heading, by striking `IRA’ the first place it appears and inserting `ELIGIBLE RETIREMENT PLAN’.

[PPA §824] (c) Effective Date- The amendments made by this section shall apply to distributions after December 31, 2007.
>>>>>>> >>>>>>>>>
Good luck.



Submitted by Alan Spross on Thu, 2008-10-16 02:44

Sorry – do not know how those emoticons got into the copy. I did not put them there.



Submitted by mayur sheh on Thu, 2008-10-16 02:55

thanks once again….just a quick follow-up from the last post where I was wondering:

** you mentioned there are three (3) options, but I noticed 2 options listed above. Was there a third option that may be considered?

2) If/once I transfer this into the Roth, is the income (e.g. interest income) taxable? I am assuming not, since it’s a Roth. Is this correct?



Submitted by Alan Spross on Thu, 2008-10-16 03:24

My original third option would have been for PNC to break out the after tax amount and give it to you, but they probably do not have the authority to do anything other than depositing it in an IRA account of some type, so abandoned that idea.

2) You are correct. Once assets are in a Roth IRA, all earnings are tax deferred and once the Roth becomes “qualified”, all distributions are tax free. To become qualified, 5 years must pass from the year of your first Roth IRA and you must also reach age 59.5.



Submitted by charles lore on Thu, 2008-10-16 04:13

Alan… If he wanted to is there any reason why he couldnt roll ( actuality convert is the better term) the entire 401k to a roth? He would just pay taxes on pre tax money. Of coarse assumimg PNC will do it… But in irs rules he could do that … couldnt he?



Submitted by Alan Spross on Thu, 2008-10-16 04:24

Yes, if he wanted to.
But if the 401k balance is large it might create a very high tax bill and elevate the marginal rate. Of course, another option is for the post tax and part of the pre tax to go to the Roth and the rest of the pre tax to the TIRA. There is no limit on how these might be split.



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