Permalink Submitted by Alan Spross on Mon, 2010-03-29 20:50
Yes, but the real question is whether they can be isolated from the pre tax amounts such that the pre tax amount go to a traditional IRA and all the after tax amounts go to a Roth IRA. The latter would be a tax free conversion since only after tax dollars were converted.
But, there are concerns that the after tax amounts cannot be isolated in that manner by doing direct rollovers. So far the IRS has not issued any clarifying guidance on this issue. There are 3 exceptions however, that should not be subject to debate on whether basis can be isolated to a Roth IRA:
1) Your plan document only allows you to take out after tax contributions while you are still in service. In that case, since the plan cannot distribute pre tax amounts, these after tax amounts could be converted.
2) You have pre 1987 after tax contributions and that balance is identified on your plan statement. These pre 87 amounts can be distributed separately and converted.
3) If you have the entire plan balance distributed to YOU, not as a direct rollover, you can roll the pre tax amounts FIRST to a TIRA, and then roll the after tax amounts to a Roth IRA because the first dollars an employee rolls over after receiving the funds is deemed to be the pre tax amount. The pitfall with this plan is the mandatory 20% withholding on the pre tax amount, which you would have to replace to complete the rollovers. You then recover the withholding when you file your return.
Permalink Submitted by Alan Spross on Mon, 2010-03-29 20:50
Yes, but the real question is whether they can be isolated from the pre tax amounts such that the pre tax amount go to a traditional IRA and all the after tax amounts go to a Roth IRA. The latter would be a tax free conversion since only after tax dollars were converted.
But, there are concerns that the after tax amounts cannot be isolated in that manner by doing direct rollovers. So far the IRS has not issued any clarifying guidance on this issue. There are 3 exceptions however, that should not be subject to debate on whether basis can be isolated to a Roth IRA:
1) Your plan document only allows you to take out after tax contributions while you are still in service. In that case, since the plan cannot distribute pre tax amounts, these after tax amounts could be converted.
2) You have pre 1987 after tax contributions and that balance is identified on your plan statement. These pre 87 amounts can be distributed separately and converted.
3) If you have the entire plan balance distributed to YOU, not as a direct rollover, you can roll the pre tax amounts FIRST to a TIRA, and then roll the after tax amounts to a Roth IRA because the first dollars an employee rolls over after receiving the funds is deemed to be the pre tax amount. The pitfall with this plan is the mandatory 20% withholding on the pre tax amount, which you would have to replace to complete the rollovers. You then recover the withholding when you file your return.