After-tax rollover to Roth IRA
I have $417K in a 401k made up of $357K pre-tax and $60K after-tax. I am retiring in March and would like to do a direct rollover of the pre-tax portion to a TIRA and a direct rollover of the after-tax portion to a Roth IRA. Is this possible or will I have to request a full distribution of the plan with 20% withholding on on the pre-tax portion? With respect to the withheld portion, if I do take the full distribution in April 2011, I won’t get credit for the withheld amount until next year, correct? So ~$71K that I will be fronting for almost 12 months?
Is there a better way to accomplish each of these rollovers?
Thanks,
Richard
Permalink Submitted by Alan Spross on Tue, 2012-01-10 00:08
You are correct about the 71k, and since you are retiring there probably is not much you could recover sooner than 12 months by reducing other withholding sources or quarterly estimates you otherwise would be paying.
Otherwise, the method you propose is the safest way to be able to isolate your basis for purposes of getting it into a Roth IRA.
One option you might pursue is to see while you are still working if you can get a distribution of just the after tax account. If you are not eligible to take out your deferrals and company matching contributions until after you separate from service, this might be a way to isolate your basis with perhaps the earnings on the after tax contributions. If you do that you could convert that balance to a Roth IRA by direct rollover. Again, if the earnings are modest enough on the 60k, this might be worth it since it will avoid the 71k withholding.
Then after you retire, you could order a direct rollover of the remaining pre tax amounts to your TIRA account. No harm in checking this out to see if you can do it, but if so find out about the amount of earnings that would accompany the 60k since the earnings would be the taxable part of the conversion.
Permalink Submitted by [email protected] on Tue, 2012-01-10 01:03
Alan,
The plan will allow a distribution of the just the after-tax account at anytime. So, I ask for a direct rollover of the after-tax money to a Roth IRA now and a direct rollover of the pre-tax money to TIRA when I separate/retire, assuming the gains on the $60K are not too onerous? I take it the 1099 for the direct rollover to the Roth IRA will show non-taxable basis and earnings separately? Will there be two 1099s – one for the direct rollover to the Roth IRA and one for the direct rollover to the TIRA?
Thanks,
Richard
Permalink Submitted by Alan Spross on Tue, 2012-01-10 03:41
Yes, that should enable you to avoid the 20% withholding.
Good question about the # of 1099R forms. I don’t see any reason why the two could not be combined because the coding is the same in Box 7. The IRAs will each issue a 5498 to enable the IRS to see where the funds went. The taxable amount (earnings) will be in Box 2a and the basis in Box 5. On the other hand, it would generally be clearer to issue different 1099R forms for each rollover. Either way, you would report both of them on line 16a and 16b of Form 1040. You would not use an 8606 to report the Roth conversion, as that was only required for 2010 conversions.