Roth 401k Recharacterization
My understanding is that if you convert funds within the 401k to Roth 401k with your eligible sources (i.e. voluntary $ over 59.5 or rollover money, assuming plan permits) that you cannot later recharacterize it. My question is, what if you convert to a Roth 401k and later decide that you need to recharacterize the account can you roll the roth 401k out of the plan into a Roth IRA and then recharacterize the Roth IRA since it is no longer in the plan?
I wouldn’t think this would be allowed but It also doesn’t make since to me to have an income cap to contribute to a Roth IRA but yet they remove the $100k limit so now you can just contribute to a non-deductable IRA and then convert it to a Roth IRA at a later date no matter what the income. Any thoughts on this would be great as well as any authority reference on the matter.
Thanks in advance
Nick
Permalink Submitted by Alan Spross on Fri, 2010-10-29 02:44
Your question is another of many that are unresolved and will need IRS clarification. There are presently no provisions to recharacterize an in plan conversion, and perhaps when the IRS addresses that issue they will also include the related question of recharacterizing after the transfer to a Roth IRA.
Since the driving force behind the in plan conversion was to assist plans in retaining retirement funds, there would be limited motivation to encourage transfers to Roth IRAs in order to make a recharacterization possible. One problem with allowing recharacterization is that the Roth IRA owner would have to supply all the data needed to calculate the allocated earnings on the conversion. That problem could also exist if someone transferred a Roth IRA containing a conversion to a new custodian, but that is relatively rare, and for a Roth 401k conversion the problem would exist in every case a recharacterization was desired. I would not hazard a guess where the IRS will go on this…. worse case scenario is that they overlook this situation and it remains unclear.
It is very obvious that those who drafted this in plan conversion provision overlooked many problem areas, and did not do their homework. It might well be that these issues are not resolved in time to do 2010 in plan conversions.
Permalink Submitted by [email protected] on Fri, 2010-10-29 15:37
Alan,
Thank you for your response. My co-workers and I brought up the same issues that you addressed and felt like that there was no way the IRS would have thought of this prior to passing the law. The IRS not doing their homework…….since when. hahahahaha
I knew that if anyone knew if this issued had been addressed or not it would be you so I just wanted to check and get it straight from the experts mouth.
Thanks for all you do Alan. You have helped me and many many others in the past and I am truly greatful. It is always to a plus to run these rules by someone else to make sure we are not missing something, becasue as we know it is ok for IRS to make errors or not think things through but if we do it we could cost our clients a fortune.
-Nick