Moving after-tax dollars from a 401K to a Roth IRA
Client has $1,500,000 in a 401K of which approximately $100,000 is after-tax dollars. He would like to roll the $100,000 into a Roth IRA while at the same time rolling the pre tax money of $1,400,000 into a traditional IRA. The plan administrator allows for the distribution be paid in two separate checks – one to his IRA and one to him directly. Can he roll the $100,000 after-tax dollars into his Roth?
Recent opinions on allowing this conversion into a Roth are very confusing and advise caution. Yesterday the President signed the 2010 Small Business Jobs Act. One of the provisions allows rollovers of pre-tax dollars from a 401K into a Roth but it is not clear to me if this addressed my question concerning the after-tax dollars.
Please help. Thanks
Permalink Submitted by Alan Spross on Tue, 2010-09-28 17:21
Roger,
This topic has been a subject of debate all year, and you could do a search for any number of them. Short answer is that nothing has been resolved and the IRS has not issued a release since Notices 2009-68 and 2009-75 of a year ago that stated that pro rate rules apply to these transfers. The attached is a comprehensive article describing various strategies to deal with this. Note that the only sure fire way to accomplish the basis isolation involves indirect rollovers with 20% withholding which must be replaced. That’s a whopping $280,000 in this case. He could distribute a part of the plan and follow that strategy, ie 140,000 of withholding would get 50,000 into the Roth IRA tax free.
http://fairmark.com/rothira/09030801-401k-basis.htm