After Tax Dollars Plan Conversion to Roth
The Employer says 100% of client after tax account is income tax free and can be converted to ROTH and they will issue a seperate check for that account. Client does not qualify for ROTH until 2010 but wants to transfer money from the plan now. Will rolling the After Tax account to an IRA today, completeing form 8606 to indicate basis, and converting to ROTH in 2010, avoid tax on the initial rollover amount? I expect any gains from now to then will be subject to income tax. Thank you.
Permalink Submitted by Alan Spross on Tue, 2009-09-08 20:04
That would not work. Once funds are rolled to an IRA, the instructions for Form 8606 require subsequent distributions or conversions to pro rate the balance of all TIRA accounts between pre tax and after tax contributions. To avoid the 8606, a Roth conversion would have to be done without rolling funds to a TIRA account.
However, doing direct conversions may also not escape the pro rate rules with respect to the qualified plan balances other than pre 1987 after tax contributions. Only the pre 87 after tax amounts can come out of the plan separately. The IRS has not yet released 1099R instructions to plan administrators on how to complete the 1099R forms reporting direct rollovers or distributions to employees with respect to pro rating the pre tax and after tax balances. The only safe way to accomplish this at this time is to request a full distribution of the plan, then first roll the pre tax amount to a TIRA and then the after tax amount to a Roth IRA. The problem with this is that the employee will need to have cash to offset the mandatory 20% withholding on the pre tax balance to complete the rollover of the pre tax amount to a TIRA. The IRS needs to resolve this issue before 1099R forms are issued in January.