rollover of after tax 401k to IRA
Client of mine retired and is rolling 401k plan that contains pre tax and after tax dollars in it. The 401k plan administrator will only do a trustee to trustee transfer for the pre tax dollars and will send a check for the after tax dollars directly to the client.
I am under the assumption that after the client receives the check for the after tax dollars, he can then within 60 days roll those after tax dollars into the IRA account.
Does this seem correct?
And if correct is there any reason to keep the after tax dollars in a seperate IRA account than the pretax dollars (other than the potential recordkeeping headache)?
As always thanks for your help
Howard
Permalink Submitted by mk foss on Sat, 2009-06-20 00:08
He should be able to roll over the after-tax money to the IRA within 60 days. I usually advise clients not to do it because of the record keeping headaches. IRS doesn’t have a reporting mechanism for these payments and I’m afraid that they will be taxed twice.
If he does roll them over, there is no need to put them in a separate IRA. All IRAs are treated as one for purposes of determining RMDs, and the tax-free portion of distributions and Roth conversions.
An IRA started with after-tax funds becomes a blend of pre-tax and post-tax dollars as soon as the first income is credited.
Permalink Submitted by Howard Hook on Sat, 2009-06-20 14:30
Thank you.
Would i be better off rolling the after tax money into a Roth IRA (assuming he qualifies for a conversion).
Although, I think that i still would have to pay some tax on the conversion since i have to take into consideration the pretax money as well?
Howard
Permalink Submitted by Alan Spross on Mon, 2009-06-22 03:26
Yes, if these funds are not needed for other purposes, it would be best to convert them to a Roth IRA within 60 days of receiving the distribution. If the plan verifies that a separate 1099R showing no taxable amount will be issued for the after tax distribution, then the conversion will be tax free.
If he is over 59.5, the Roth conversion can be withdrawn tax and penalty free, but if under 59.5 the 5 year holding period applies until he reaches 59.5 on the conversion funds to avoid the 10% penalty.