After tax contributions to a Roth
!00% agreement (is that ever possible?) that After – tax contributions to a 401(k) can be rolled over into a Roth IRA?
Yes, that is the question. If the Company can issue 2 separate checks, one to the Trust company for the pre-tax portion to be rolled into a Tradional IRA and the other to the client for the AFTER-tax portion, that After-tax portion can be cashed and rolled into a ROTH IRA w/ in 60 days, correct?
Not necessarily. To be completely safe both distributions must be made to the employee and then the (former) employee must first roll the pre tax amount over and after that is completed, do the Roth IRA rollover. Sec 402(c)2 is worded such that this order is only established if the distribution is made to the employee first. Of course, the problem here is the 20% withholding which the employee must make up to complete the rollovers. Many employees do not have the cash available to do this.
That said, doing a direct rollover to a TIRA and sending a check to the employee for the after tax amount has been going on for years, even before the employee was allowed to roll the after tax money over in 2002 and later years. The IRS has not invoked pro rate rules for those distributions and they also have not invoked the pro rate rules for the distribution pattern you cite…. at least not yet. Neither have plan administrators been given direction on how to allocate basis to the various 1099R forms they issue, rollover or simple distribution.
I really can’t see the IRS going back and requiring re assignment of 2008 and 2009 distributions at this point, although anything is possible.
But going the indirect rollover method is safer if you can come up with the withheld dollars to complete the rollovers.
Thanks so much for your detailed response. Many of my clients are phone company retirees and they typically have larger rollovers, with little cash outside of retirement plans. So, coming up w/ 20% of a $500,000 rollover would be unlikely for most, if not all , of them. They all have after-tax contributions , as well. Sounds like there would be a danger to do it the way I described? I do appreciate your response. Jeff
Permalink Submitted by Joseph Arsenault on Tue, 2010-03-30 17:22
What?
Are you asking how to seperate basis and isolate it for a Roth conversion from a 401k? If so, I believe this issue has been previously. Many people feel that using an indirect 60-day rollover for the value of pre-tax basis first seperates the pre/after tax dollars, then the remaining amount can be directly converted to a roth tax free.