after-tax IRA conversion to Roth (new 401k rules)
I have read there was a change to the 401 rules where after-tax money can be converted to a Roth IRA without tax (and no limit on amount). I have not been able to confirm this on any IRS publication (the information was in the 12/28/08 Washington Post article “a sweet deal on Roth IRA conversions”. This seems too good to be true.
My company allows after-tax contributions to our 401. Can I utilize this to make deposits to my 401 and in 2010 (where there is no income cap, as I am above the current cap) transfer only those after-tax contributions to a Roth?
I also have a few thousand of after-tax contributions in an existing IRA. What about those funds.
Thanks!
Permalink Submitted by Marvin Rotenberg on Tue, 2009-01-06 19:35
Your after tax contributions in your 401 (k) plan may be elgible for a Roth IRA. In order to get these fund out of the plan you may need a trigering event ( check plan document) and you will need to receive the after tax money in a seperate check. Your Modified adjusted gross incone can not exceed $100,000 until 2010. Also if your married you will not qualify if you are filling seperate returns.
Your after tax money in an IRA could go to a ROth after 2010, when the $100,000 limit goes away. However, don’t forget the pro-rata rule. You can not just cherry pick the after tax money, even if it is in a seperate IRA, it needs to be combined with the pre-tax money.
Marvin
Permalink Submitted by Denise Appleby on Tue, 2009-01-06 19:41
A few things to bear in mind.
The 401(a) has to have a 401(k) feature, allowing you to make salary deferral contributions. And the plan also has to take it a step further and allow you to make after-tax contributions.
You must be eligible to make withdrawals from the plan in order to complete the conversion to the Roth IRA.
Your distributions will include a pro-rated amount of pre-tax and post tax. Therefore, if your balance is $100,000 ( for instance), which is made up of $80,000 pre-tax and $20,000 after-tax, any distribution that you take will include 1/5 after-tax and 4/5 pre-tax. This means that you can’t get to just the after-tax funds in your account.
You can rollover the after-tax portion to your Roth IRA, but only after you have rolled over the pre-tax amount ( to any eligible account). So, if you withdraw $50,000, it will include $40,000 pre-tax and $10,000 after-tax. Any amount that you rollover will include the $40,000 first.
Permalink Submitted by Denise Appleby on Tue, 2009-01-06 19:43
Hey Marvin,
Guess we were posting at the same time , but you type faster? 😆 ,