Earlier this year I recommended to a client and followed to the letter the strategy of isolating 401k basis by
taking a single indirect distribution from the QRP and rolling the pre-tax and after-tax (non-Roth) portions into, respectively,
a rollover IRA and a new Roth IRA. We made up for the required tax withholding with available after-tax cash.

After taking a tax update this month, the instructor and I discussed this strategy in light of the 2011
Paschall v Commissioner ruling (137 T.C., No.2). Not that facts and circumstances are similar, but I have
become concerned that, if the isolation of basis strategy is challenged, then it may follow this course:

1. Rolling QRP after-tax dollars into a Roth IRA is different that rolling them into
a TIRA. A Roth IRA is a different animal than a TIRA.
2. That being the case, if disqualified, the amounts in the Roth represent an excess contribution
and, as such, are subject to the 6% penalty. It’s that 6% on $65,000 that concerns me.

I want to present to the client the plusses and minuses so they can decide whether to stay put or simply
remove the new Roth dollars into a taxable account (or a non-deductible IRA, for that matter).

Are there opinions or experiences with the isolation strategy that have developed during 2011 that can be shared? Also, are there
any special reporting requirements/disclosures that should appear on the 2011 tax return?

Many thanks and Happy Holidays!

Chip Simon