In Service distribution to TIRA and Roth
My plan allows 401k in-service disributions. Fidelity handles the account. A Fidelity CFP and a Fidelity institutional representative told me yesterday I could (1) take an in service distribution of my after-tax contribtions and make a direct rollover to a Fidelity Roth IRA and (2) take a partial distribution of my pre-tax contributions and make a direct rollover to a Fidelity TIRA. The Fidelity reps were vey clear on a tape recorded line that both were non-taxable transfers. I created new Fidelity Roth and TIRA accounts yesterday and gave the institutionl rep the go ahead to initiate the transfers.
Should I be concerned about the advice I recieved from Fidelity? If so and assuming I have a few days to cancel the transfers, what is my best course?
Thanks.
Permalink Submitted by Alan Spross on Sat, 2009-05-30 00:06
Not too many plans allow for this level of in service distributions, but they are allowed to with the exception of your own employee deferral. I expect that the pre tax amounts are composed of gains, company matching contributions and possibly forfeitures from others. What is not real clear is the option of avoiding the pro rate rules for each transfer, assuming none of your after tax contributions are pre 1987. Fidelity is indicating a separation per IRA type, which is to your advantage. I would ask them why such transfers are not subject to each being pro rated, and if they are totally sure that the 1099R forms will conform to what they are indicating.
If they change their mind, the real advantage is for you to get the after tax amounts into a Roth IRA. You must be under the 100,000 income limit to qualify to do this in 2009, but the income limit disappears after this year. If you can’t move the pre tax amounts to a TIRA, that is not an advantage anyway, at least not tax wise.
This is the same issue that there has been some debate about with respect to the more typical post separation transfers. If your plan permits the distribution of all but your own pre tax deferral dollars while in service, the issue would appear to be the same with respect to the pro rating between post tax and pre tax.
Bottom line is that I am not sure whether they have this right or not, but if they issue the 1099 R to conform to their indication, your risk of any problems is much reduced.
Permalink Submitted by Kyle Sandel on Sat, 2009-05-30 15:31
Thanks Alan.
My 2009 income will definately exceed $100k. Fidelity never asked that question. Can I undo this and wait until 2010 without tax and penalty?
Permalink Submitted by Kyle Sandel on Sat, 2009-05-30 21:45
My concerns in order are to (1) avoid any penalty, (2) avoid any current tax. I am age 54 this year.
Permalink Submitted by Alan Spross on Sun, 2009-05-31 00:34
If your 2009 modified AGI will be over 100,000, then you must recharacterize the Roth conversion. However, the recharacterization cannot go back into the plan and instead will have to go into a traditional IRA. This action would eliminate the tax efficiency of getting the after tax dollars into a Roth by themselves, since after tax funds in a TIRA can only be converted pro rata will pre tax funds using Form 8606. 8606 would be used to report the added after tax contribution as well as calculating the amount of your next conversion in 2010 or later that is taxable.
I am surprised that Fidelity did not question you about your income, as IRA custodians typically do. But since employer plan rollover conversions are new, I suspect that the service people there are not fully up to speed on this particular transfer. I suggest calling them ASAP and try to stop the Roth transfer, telling them why. Remember that these rollovers/conversions do NOT count in your income, but you probably knew that in figuring your 2009 estimate of AGI.
To summarize, if you cannot stop the Roth transfer, you will have to recharacterize it to a TIRA account. There will be no tax or penalty in so doing, but the big downside is that your 2010 conversions would have to be pro rated on Form 8606 using your full TIRA balance for all your TIRAs. Considering this, you should probably try to stop the TIRA transfer as well as the Roth transfer because the TIRA transfer will just add to the pre tax portion of your TIRA.
Permalink Submitted by Kyle Sandel on Sun, 2009-05-31 22:31
The transaction register shows a check for the post-tax contributions has been mailed. I will tell Fidelity return the check with instructions to cancel the post-tax distribution.
The pre-tax money is an in-house electronic transfer and has already left the 401k and is pending deposit to the TIRA. I don’t see an advantage to reversing that, let me know if I missed something please.
Thanks again.
Permalink Submitted by Alan Spross on Mon, 2009-06-01 00:08
You might have missed my final paragraph on prior post. If BOTH tranfers go through, you will have a much larger TIRA balance, and then next year if you want to convert any of your TIRA balance to a Roth IRA, the conversion will have a much heavier taxable percentage. This depends on whether the after tax transfer can be stopped or not. If you are sucessful in stopping the after tax transfer, it will save you from recharacterizing the conversion and also preserve the possibility of doing a tax free conversion directly from the plan next year when you are income eligible. If the after tax transfer is stopped, no harm in letting the pre tax go through. But if the after tax transfer cannot be stopped, then you should try to stop the pre tax transfer. Confusing, I know.
The importance of all this depends on the following dollar amounts:
1) How much of a TIRA balance you already have
2) The amount of the after tax 401k transfer, which would have to be recharacterized to a TIRA if it goes through (because it cannot go back to the 401k plan).
3) The amount of the pre tax 401k transfer.
Permalink Submitted by Kyle Sandel on Thu, 2009-06-04 14:10
Thanks, I understand now.
If the transfers cannot be reversed then please consider this question:
The 401k plan accepts transfers from IRA accounts. If the transfers cannot be reversed then would it make sense to transfer the recharacterized Roth and TIRA accounts into the 401k? Would this put me back in a position to make a 2010 in-service withdrawal and rollover of the post-tax money to a Roth? I am assuming that Fidelity would appropriately reflect the pre- and post-tax amounts of the transfer in the 401k account.
Thanks!
Permalink Submitted by Alan Spross on Thu, 2009-06-04 18:25
A version of what you propose can be done, but not exactly using the identical procedure. A 401k plan CANNOT accept any after tax amounts from an IRA in an incoming rollover, but you could contact the plan to see if they will take your total pre tax traditional IRA balance. If you can get that done this year, your entire remaining balance in the TIRA would be after tax at the time of the rollover. Then, in 2010 you can convert what is left in your TIRA to a Roth IRA tax free except for the small amount of earnings that you accrue after the rollover. In 2010, there is no income limit. You would file Form 8606 on your IRA in the year you report the conversion, both to report the conversion itself and also to report the after tax basis your IRA picked up from the recharacterization. These go on different parts of the 8606.
If you have other TIRA accounts, you will need to transfer all of the pre tax amounts to Fidelity. No matter how many IRA accounts you have, they are considered combined for tax purposes. Note that many plans will not accept IRA amounts if they know you have after tax dollars in your IRA, but perhaps Fidelity will because they are familiar with your situation. What they don’t know however is the breakdown in other IRA accounts you may have.
Before going through all this, be sure your modified AGI is over 100,000. The conversion itself does not count, and if you have 401k contributions, they do not count either. So unless you are considerably over on obvious items like salary, it may save work to take another look at the estimated modified AGI total.