401K conversion to Roth

Submitted by Douglas Broome on Tue, 2010-09-14 15:58

I am 69, retired federal employee, and returned to work part-time for a professional association. I have been participating in that association’s traditional 401k because it has yet to offer a Roth 401k. (I have been working on that shortcoming.) I may want to convert the regular 401k to a Roth 401k to take advantage of reporting the income in 2011 and 2012. I understand I cannot do that conversion while still employed with the on-going traditional 401k. Can I arrange things with my employer to resign, which would allow me to transfer the traditional 401k to a Roth IRA, and then be rehired virtually over the weekend? I would begin a new traditional 401k offered by that association or start a Roth 401k if I succeed in getting the association to offer a Roth 401k as a companion to its traditional 401k. I plan to work for not more than two more year before retiring completely as I shall be 70.5 then and will have to take RMDs from my federal TSP which is too large to convert to a Roth IRA because of the huge tax bite that would entail.

Thank you. Douglas.



Submitted by Alan Spross on Tue, 2010-09-14 20:51

The association would probably not want to terminate and rehire for the purpose of allowing you to take a distribution. But many plans allow you to take in service distributions after 59.5, so check if that is possible with your plan.

As a TSP retiree, you should be allowed partial distributions so why not convert only the amount you wish to a Roth IRA this year and then split the income between 2011 and 2012. Since you probably have more than enough funds in the TSP to convert, there would be no particular need for you to have the Roth options with the current employer.

Note that there is also a bill floating in Congress to allow separated employees to convert the pre tax 401k (TSP) to the Roth option within the plan, but probably only a slim chance that this would be passed in time for you to get a 2010 conversion done within the TSP. But check on the partial distribution or direct Roth conversion from the TSP to a Roth IRA.



Submitted by Douglas Broome on Wed, 2010-09-15 11:50

Thank you for the response. It is very informative especially with respect to the TSP comment.

You suspect that my association employer would decline my resignation/rehiring gambit for purposes of my getting the traditional 401k transferred to a Roth IRA. My employer is very informal and cooperative, so I suspect there is a decent chance it would cooperate with me. I shall ask. Assuming that is so, is there anything illegal, IRS-wise, in doing what I propose if my employer will cooperate? Of course, if my current employer’s traditional 401k plan will allow a distribution to me while still employed and also being over age 59.5, that might be the best route. The question would be if the current plan would allow a distribution of my entire current balance or only a part of the current balance. I shall enquire.



Submitted by Alan Spross on Wed, 2010-09-15 19:24

If your employer would agree to that and processes a termination and rehire, the IRS will not object. But if they are willing to do that, then they would be better served amending their plan to allow in service distributions after 59.5. If they allow such distributions now, no need to pursue the termination. But if not, better check on what this will do your vesting of any employer matching contributions, as well as such things as sick leave, vacation, any waiting period to resume plan contributions etc.



Submitted by Douglas Broome on Wed, 2010-09-15 21:50

Thank you for the clear reply. If I find that my current traditional 401k plan will allow in-service distributions to me, being older than 59.5, I would want to move this directly to a Roth IRA. (This is what I would do if I had to go through the termination-then-rehire gambit.) Would the in-service distribution have to come to me or could I have it sent directly to the Roth IRA? I would prefer not to touch it in transit.



Submitted by Alan Spross on Wed, 2010-09-15 22:36

If you are allowed a distribution, the plan MUST provide a direct rollover to a Roth IRA (conversion) per the IRS tax code.



Submitted by [email protected] on Thu, 2014-12-18 16:19

Alan, can you quote the source for the IRS Tax code requiring this?  Thanks, -m



Submitted by Alan - IRA critic on Thu, 2014-12-18 16:28

  • Yes. Sec 401(a)(31).

401(a) (31) Direct transfer of eligible rollover distributions.— (A) In general.— A trust shall not constitute a qualified trust under this section unless the plan of which such trust is a part provides that if the distributee of any eligible rollover distribution— (i) elects to have such distribution paid directly to an eligible retirement plan, and (ii) specifies the eligible retirement plan to which such distribution is to be paid (in such form and at such time as the plan administrator may prescribe), such distribution shall be made in the form of a direct trustee-to-trustee transfer to the eligible retirement plan so specified. 

  • The original situation involved an in service distribution, which may not be allowed unless certain conditions are satisfied. But if the plan will issue a distribution at all, the direct rollover requirement would apply whether participant was separated or still working.


Submitted by [email protected] on Thu, 2014-12-18 17:14

thanks again. -m



Submitted by Douglas Broome on Wed, 2010-09-15 23:59

Thank you. This thread has greatly clarified matters for me.



Submitted by Douglas Broome on Fri, 2010-09-17 15:22

To bring this to conclusion. I have determined that my employer’s plan does allow for in-service distributions after age 59.5. No need to go through the resignation/rehiring ploy. Thank you for the suggestion that I investigate the matter with the employer. It solves my problem.



Submitted by kathleen Lane on Fri, 2010-09-17 20:23

The Small Business stimulas program passed by the Senate yesterday includes provisions enabling employers to offer a conversion from a 401(k) to a Roth 401(k).

stay tuned

kathy



Submitted by Douglas Broome on Sat, 2010-09-18 12:05

Interesting. One must ask when this is likely to go into effect. Also, will it be optional for employers or required?

More importantly, what would be the benefit of converting to the employer’s Roth 401k instead of transferring the funds to a Roth IRA, given that I can do in-service distributions from current traditional 401k because I am older than 59.5? It seems to me, from all that I have read, transferring to a Roth IRA is the superior alternative in all respects. Am I missing something?



Submitted by Alan Spross on Sat, 2010-09-18 19:35

This article addresses many of your questions, but no way to predict if YOUR plan will be ready to go with it in time for A 2010 Conversion.

http://blogs.forbes.com/ashleaebeling/2010/09/16/turn-your-401k-into-a-r…

I agree that transferring to a Roth IRA makes more sense to me, unless you have specific creditor problems and your state does not protect IRA accounts. Otherwise, the Roth IRA has better tax rules for distributions before your Roth is qualified, and NO RMDs to deal with. So unless you are still working at 70.5, you will want to transfer your Roth 401k into a Roth IRA by then to avoid RMDs. And when you do transfer the Roth 401k to a Roth IRA, if you have not met the 5 year holding period for the Roth 401k (plus age 59.5), the Roth IRA holding period replaces the years you held the Roth 401k. Therefore, you may be better off getting the Roth IRA clock started sooner.



Submitted by Alan Spross on Sat, 2010-09-25 04:18

Note that the Senate Bill does NOT provide for any recharacterization option for in plan Roth conversions. Therefore, if your account value takes a large hit, you are stuck with the tax bill for the conversion.



Submitted by Douglas Broome on Sat, 2010-09-25 12:55

To be specific, Alan means no recharacterazition provision for conversion of traditional 401(k) to Roth 401(k)s, if the Senate plan becomes law. This will not broaden to cover 401(K) conversions to Roth IRAs, I trust.



Submitted by Alan Spross on Sat, 2010-09-25 17:50

That is correct. Following is a link that explains the issues that occur after the law is signed. There are several attendant issues that need to be resolved:

http://www.americanbenefitscouncil.org/documents/roth_summary-dh092010.pdf



Submitted by Douglas Broome on Sat, 2010-09-25 18:53

The article by the American Benefits Council, accessed via the link, is thorough and informative. Thank you. Fortunately, for those of us over 59.5 most of the discussion will not pertain. As I understand it, there would be very few instances where converting from a regular 401(k) to a Roth 401(k) while still employed would be a better choice than converting to a Roth IRA from the regular 401(k). I mean to say that in almost all instances the Roth IRA conversion would be superior to a Roth 401(k) conversion, it strikes me.

I have started the process of converting my traditional IRAs to Roth IRAs, and an unexpected wrinkle has arisen. I shall start a new thread about this.



Submitted by James Mealy on Tue, 2014-03-25 05:22

It is my understanding that no part of the RMD can be deposited into a Roth,  BUT, how much extra can be converted to a ROTH ?Are there different rules re: 401K $$ vs  Lump Sum pension accts. . .  Is there any probs w/conversion, prior to 70 1/2. . .



Submitted by James Mealy on Tue, 2014-03-25 05:25

How much over RMD can be converted to ROTH, & prior to ge 70 1/2..



Submitted by Alan - IRA critic on Tue, 2014-03-25 17:00

You can convert as much as you wish, but of course the tax bill can become quite large. There is no difference on the conversion rules before or after the RMDs begin other than the RMD must be fully satisfied prior to converting any additional amounts. In general taxes will be lower when converting prior to RMDs because once RMDs begin, you will be taxed on both the RMD and the conversion and this can increase marginal rates. The same can be said about SS benefits, ie the best time to convert is in years with the least other income, and for retirees that would be before SS and RMDs begin.



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