401k rollover with after tax contributions
I’ve run upon a bit of a unique case…for me anyway. This client is age 73 and retired. He still has the old 401k with his previous employer and now wants to roll it out. It is a complex mix of pre tax and after tax with some being pre-1987. The breakdown in rounded $$$ is….$35K “pre-tax contribution”….$79K “after-tax contribution”….$14K “pre-87 after-tax contribution”….$10K “pre-tax match”….$31K “after-tax match”…..listed in that order on his statement. What would be the process to roll this out of his 401K with the least amount of headache….and taxes? By-the-way, none of the $$$ are invested in company stock. Thanks for your help!!!
Permalink Submitted by Greg Henson on Tue, 2012-05-22 19:41
A lot of recordkeepers have the ability to rollover any pretax money (EE, ER, earnings on after tax, etc) to a rollover IRA with the ability to take the after tax contributions to the participant. Once the participant receives the after tax check, he could then do what as he wants with it.
However, it is important to note that he must take his RMD prior to rollover over anything.
Permalink Submitted by Alan Spross on Tue, 2012-05-22 21:33
A plan to address this depends on whether:
1) He wants his RMD to be taxable or tax free (RMD is around 7,000).
2) He wants the after tax portion that is not applied to his RMD to be rolled into a Roth IRA or whether he wants to keep it in a taxable account.
Unfortuneately, because of IRS Notices that require pro rating of direct rollovers, the way around that is a bit of a hassle since it does not apply direct rollovers in favor of indirect rollovers that include 20% withholding on the pre tax portion (20% of 76,000 = 15,200). So Q 3 is:
3) Does he have cash available to temporarily replace all or part of the 15,200 withholding until he gets his tax refund next April?
Permalink Submitted by Ratu Joni on Wed, 2012-05-23 05:42
Thank you for sharing your well-researched information.