Roth IRA Question
A client transferred some of his pre-tax 401(k) money to an IRA over the past few years while employed (this was permissable under the plan as “in-service” transfers after age 59 1/2). In addition, the 401(k) returned excess contributions he made for three years and he reported these amounts on his tax return. He then contributed these monies each year to the above IRA.
The IRA account has decreased in value approx. 20% (due to the market) and he wants to transfer all the pre-tax monies back to his 401(k) at work, and then transfer the ORIGINAL after tax IRA contributions to a Roth IRA (tax free) on 1/1/10. What is the proper way to handle pre-tax 401(k) monies and after tax IRA monies comingled in the same account after a 20% decrease in IRA account value?
Permalink Submitted by Alan Spross on Mon, 2009-11-30 22:18
One problem complicating your question may be the contributions of excess contributions from the 401k plan to the IRA. These are NOT rollover eligible and constitute an excess IRA contribution. However, if he just used this money to subsidize a regular IRA contribution that he was eligible to make and did NOT report it as a rollover contribution, then he is OK. This issue needs to be dealt with prior to the other question.
Were these funds from the 401k the “after tax” contributions in the TIRA? If so, the strategy of converting them becomes moot since they must come out of the TIRA. If he has other after tax amounts in the TIRA and IF his plan will accept the pre tax amount as a rollover, then he could convert the remaining amount. Whatever is the amount of his after tax basis in the TIRA, that does not change and is unaffected by a change in value.