401k in-service non-hardship eligible funds for roll-over
For an employee in-service, age 57, what 401k funds are eligible for an IRA roll-over? The plan document is liberal and
will allow a transfer at this age but it seems that not all funds are eligible for an IRA roll-over pre-59 1/2.
Permalink Submitted by Alan Spross on Tue, 2011-03-08 21:57
See attached article which goes into this subject in some depth.
Most likely you will find that the employee’s pre tax salary deferrals cannot be distributed until at least 59.5. The remainder of the balance can be distributed under the more liberal plan provisions. IRS rules also allow for separation of pre 1987 after tax deferrals which can come out separately and not subject to the pro rate rules which apply to other allowed distributions. For an in service distribution, the plan will generally pro rate the taxable portion over just the balances eligible for distribution. For example, if the pre tax deferrals are not eligible for distribution, then that part of the plan balance should not be included when calculating the after tax portion on the 1099R.
http://www.accumulatingmoney.com/can-i-rollover-my-401k-while-still-empl…
Permalink Submitted by Jim Wolstenholm on Tue, 2011-03-08 22:03
…continuing on with this same 57 year-old employee, he also has an IRA in addition to his 401k. Can he transfer both
the eligible funds from the 401k and the funds in the IRA into one single traditional IRA? Thanks for the previous post,
you confirmed what I understood.
Permalink Submitted by Alan Spross on Tue, 2011-03-08 23:21
Yes, they can be combined. As far as any after tax contributions included in the rollover, the next time a Form 8606 would need to be filed for any other reason, the after tax amount rolled over should be added to line 2 of Form 8606. That prevents double taxation of any IRA distributions.
What becomes a logistical quagmire here is if the employee wanted to “isolate the basis” and send the after tax amount to a Roth IRA (tax free conversion) and the pre tax amount to a TIRA. There are countless posts on this site about whether this will work and IRS releases that suggest that the after tax amounts would have to be pro rated over both IRA types. If this is what the employee wishes to do, as things stand now, there is only one way to be sure that the IRS will not challenge the tax status of the rollovers:
1) Do not do a direct rollover, ask for the distribution to be sent to the employee. 20% of the pre tax amount will be withheld under IRS requirements
2) Employee rolls the gross pre tax amount to a TIRA
3) Then roll the after tax amount to a Roth IRA, replacing the withheld amount to make the rollover complete
4) Recover the withholding by reducing current withholding or estimates if employee does not want to wait until filing the next return.
Obviously, the employee must have spare cash to execute the above. But right now this is the only fool proof method of accomplishing the “isolation of basis” strategy