401k Indirect Rollover
We have a client with some post-tax contributions in their 401k. Our understanding is that the client can do the following:
1. Take possession of the entire 401k balance
2. Write a check to their Roth IRA custodian in the amount of the post-tax contributions to be credited as an indirect rollover from the 401k.
3. Write a check in the amount of the remaining total balance of the 401k including making up for the 20% manditory withholding to their IRA custodian to be credited as an indirect rollover from the 401k.
First question: Is this above understanding correct?
Second question: Once the indirect rollover to the traditional IRA is complete, we would like to convert a portion of the funds to a Roth IRA. Upon completion of the Roth conversion, we intend to transfer the converted amount to a Roth IRA at another custodian. Are there any limitations to moving the funds once the indirect rollovers have been completed?
Thank you for your help.
Permalink Submitted by Alan Spross on Wed, 2010-06-09 01:21
Not quite correct.
The order in your list of 3 needs to be changed such that the TIRA rollover is done FIRST. This is vital to trigger the provision is Sec 402(c)2 which states that amounts rolled over by the participant are first deemed to emanate from pre tax amounts. Therefore, the TIRA rollover must be done first, then the Roth conversion including the replaced withholding dollars done last. Obviously, if the after tax amount is small, the TIRA rollover itself might also require some replaced withholding dollars along with the entire Roth conversion portion.
The 3 steps are not affected by direct trustee transfers done either before or after these indirect rollovers.
Permalink Submitted by Michael Eischen on Wed, 2010-06-09 11:06
Thank you for the information and quick reply.
Permalink Submitted by Michael Eischen on Wed, 2010-06-30 13:40
I would like to add one additional variable to the situation described in the original post. In addition to the 401k that will be rolled over, the client also has an existing Traditional IRA that was a rollover from their pension plan earlier this year (2010). Given that the indirect rollover as described in the original post and corrected by Alan avoids the Pro-Rata rule, does the existing Traditional IRA change that in any way?
Permalink Submitted by Alan Spross on Wed, 2010-06-30 18:02
The existing TIRA does not affect the tax free Roth conversion because that conversion is a conversion of after tax 401k funds. Those funds were never part of a TIRA and therefore would not become subject to Form 8606 and it’s pro rate applications.