After-tax 401K distribution roll to Roth
Male 60 years, still working, Employer allow in sevevice distribution
Employer will distribute $300K, with a letter saying $200K is pretax, & $100K is after tax
Can I keep the $200K in my IRA, & take the $100K to my Roth.?
Thank you
Rod Skaf
Permalink Submitted by Alan Spross on Fri, 2011-02-18 21:46
The letter does not mean much, it is the 1099R that the IRS will be looking at.
The only risk free way to accomplish the “isolation of basis” that you want here is to do this by indirect rollover and then roll 200k to a TIRA first and then 100k to a Roth IRA second. The problem with this is that the plan will withhold 20% of the pre tax amount or 40,000. You would have to replace the 40k to complete the rollovers and can recover the 40k through reduced salary or other withholdings right away or in the worst case when you file the 2011 tax return.
If you do direct rollovers you avoid the withholding, but take the risk that the IRS will require pro rating of your basis. That would mean that 1/3 of your TIRA would be after tax and 2/3 of your Roth would be pre tax, ie a taxable conversion amount of 66,667. The IRS has not clarified rulings they made in 2009 with respect to this issue. You might decrease your risk somewhat if asked the plan to do a direct rollover of the 200k to a TIRA and send you a check for the 100k that you would deposit in a Roth IRA yourself. That would produce a separate 1099R for the 100k showing no taxable amount, if the plan agrees to issue their 1099R that way AND the IRS does not order changes to the way they issue their 1099R forms before next filing season.