401K Rollover Tax Avoidance
Can you rollover a 401K that has [u]pre-tax monies [/u]and [u]post tax monies [/u]to a Rollover IRA (pre-tax monies) and a Roth IRA (post-tax monies) directly without the pre-tax money becoming taxable (if done within 60 days)? All pre-tax monies in the 401K would go 100% to IRA and all post-tax monies would go 100% to the Roth-IRA. Or does 100% of the 401K money need to go to the Rollover IRA first, and then move the post-tax money to the Roth IRA. I want to avoid the comingling of pre and post tax monies (pro rata rule), plus also avoid having the pre-tax money becoming totally taxable if [u]all[/u] monies need to go into the IRA first. I would appreciate any guidance anyone can give me.
Permalink Submitted by Brendan McPoyle on Fri, 2010-09-24 18:05
I’m interested in the same information. Initially Mr. Slott had advoscated moving the post-tax funds directly to a Roth IRA, thus avoiding any tax and penalty. The remainder funds would go to the IRA. This strategy has come under some discussion ( http://www.fairmark.com/rothira/09030801-401k-basis.htm ).
Is it still a viable strategy?
Permalink Submitted by Alan Spross on Fri, 2010-09-24 19:10
I would go with the Fairmark article at this point, since there is no telling how the IRS will resolve this issue. Note that the strategy of doing these rollovers indirectly in a specific order is supported by the code and avoids the uncertain issues. But it does require replacing the 20% of mandatory withholding until the return is filed. In summary, request a full distribution to yourself, then first roll the pre tax balance to a TIRA in a 60 day rollover, replacing withheld dollars as needed. Then roll the after tax amount to a Roth IRA. This is supported by 402(c)2 of the tax code, which refers to distributions made to the employee. The gray area is that direct rollovers are not subject to this wording, and the IRS Notices 2009-68 and 2009-75 suggest that pro rating of basis would be required in that case.
If you cannot replace all the withholdings, you could ask for a partial distribution, and do the rest in a later year. You don’t need the 2010 two year deferral anyway if the Roth portion is all after tax.
This issue has existed since 2008, which was the initial year for direct Roth conversions. The American Benefits Council has appealed to the IRS to clarify their intent 3 times now, and other benefit firms have asked as well. I suspect the lack of response is due to the many conflicting issues which result in any particular solution being inconsistent with prior handling, ie no easy way out for the IRS.