Rollover of Post 86 After-Tax balance to 401(k)
I have separated from service from previous employer and have nearly $30k of my plan balance that is post-86 after-tax contributions (no attributable earnings). I am trying to avoid the pro-rata dilema and am considering two options as follows:
1) Rolling over my entire plan balance of $120k to my existing Rollover IRA (only IRA) and then rolling the entire pre-tax amount of approximately $170k ($90k from plan and $80k from previous rollovers & earnings) back to my current employer plan that allows for rollovers into the plan for current participants. This would leave the $30k isolated in my IRA for subsequent conversion to my Roth IRA. I might sometime early in 2011 request a pre-59 1/2 non-hardship withdrawal of my rolled over balance(allowed in plan) to be rolled back to my original rollover IRA to enable me more investment flexibility going forward. I feel comfortable with this strategy considering what I understand the rules to be + previous posts on this forum as well as Kaye Thomas’ article “Isolating Basis…” from Fairmark website dated earlier this year.
2) Request a split distribution where I would rollover all pre-tax amounts ($90k) from old plan to my existing Rollover IRA and separately rollover my post 86 after-tax balance ($30K) to my current employer plan which does accept after-tax rollovers from previous employer plans. I would subsequently take a similar pre-59 1/2 withdrawal of the after-tax balance and direct it to my Roth IRA as a non-taxable conversion (assuming no earnings on $30k basis). This of course assumes my previous plan can make such a split distribution.
Does anyone have any thoughts on this 2nd option or know of any precedent for doing it this way to avoid pro-rata dilema?
Thanks
Permalink Submitted by Alan Spross on Sat, 2010-08-07 23:14
There is nothing to preclude Option 2 from working, but the two plans would have to offer all the options required for it to work. They would also have to offer them at the time you plan to execute each one. The last piece of this plan is the most likely to be a problem. The new plan would have to include a provision that allows special in service distribution options to rollovers from another plan while at the same time not allowing them from their own plan contributions. Otherwise the pro rate issue pops up again where rollovers are pro rated between pre and post tax amounts. Good chance that these two plans had not done an Option 2 in the past, so there is a risk of miscommunication. You need to be sure that they both understand the entire stucture and can communicate the status of these contributions. Your new plan needs to track the after tax contributions from day one and properly ID them.
You probably recall reading that if you were able to replace the 20% withholding, you can accomplish what you want by doing an indirect rollover of the entire former plan. The replacement funds you would have to come up with are 20% of 90k = 18k. You would roll the 90k to your TIRA and 30k composed partially of your own 18k to the Roth IRA. You would recapture the withholding when you filed your tax return, or earlier if you cut back your current withholding amount.
Keep in mind that the investment options and expenses of your new plan should be favorable in the event your rollovers are stuck there for a considerable time. This is also applicable if you use Option 1, so you would double check in advance whether you can do an in service direct rollover of that 90k back to your TIRA.
There is less that can go haywire with Option 1 than Option 2. You also have to factor in the possibility of a new IRS ruling on this whole issue of isolating basis that could change things. The IRS has already created major ambiguity with the Notices they issued on this subject in 2009 and they are under pressure to clarify things including the 1099R instructions to plan administrators.
Permalink Submitted by Matthew Frederick on Wed, 2012-09-26 21:25
If a participant has multiple sources in 401k plan and that plan has a specific ordering of distributions based on those sources – ordering example: after-tax then rollovers, then company match, then employer discretionary, then pre-tax EE deferrals, then Roth Deferrals, then couldn’t one still isolate the after-tax source (pre 87 or post 86) and only request that amount even if the plan allows full distribution after 59 1/2? I understand any earnings associated with post 86 after-tax would have to come out with basis…
Thanks
Permalink Submitted by Alan Spross on Thu, 2012-09-27 00:22
I don’t think any ordering rules would apply after you separate, except for any pre 87 after tax contributions, if you request their separate distribution.
I am not aware of any guidance relative to ordering rules, but the IRS will be guided by the 1099R form. There are fewer things that could go wrong if you had the distribution made to you, verified with the plan that the taxable amount would be -0- or only include a small amount of earnings, and then you did your own IRA rollovers, either all to your Roth IRA or any earnings rolled first to your TIRA. There would be 20% withholding only on the pre tax amount which you would have to replace to complete the rollovers.