rollover of 401k that includes pre-tax, after-tax and roth
I know this is a subject that has been discussed often but I wanted to try to get some insight as to this particular four-sided issue. Don’t know why but local CPAs seem utterly confused by this issue.
Client has a 401k that includes pre-tax contributions, after-tax contributions, roth 401k contributions, and company stock. She is about to retire and would prefer to rollover to her own IRAs, in whole or in part.
So this account has fully taxable funds, fully tax-free funds (the Roth), and gain only-taxable funds (after tax) as well as company stock (a publicly traded company)
My goal would be to rollover the after tax portion to a Roth IRA, rollover the Roth 401k portion to a Roth IRA, rollover the pre-tax portion to a TIRA, and achieve some tax relief on the NUA portion (company stock). It is my understanding that the company match is all company stock.
It’s the mechanics of accomplishing this that concerns me. To be safe, should the rollovers to Roth IRAs be to newly established, separate accounts or is it appropriate to put them into an existing Roth IRA that has been held for more than five years?
I would greatly appreciate any advice from this learned forum.
Thanks.
Permalink Submitted by Alan Spross on Wed, 2012-05-23 04:26
The two main reasons for confusion here are:
1) The IRS has issued Notice 2009-68 indicating that basis must be pro rated with respect to direct rollovers to TIRA and Roth IRA accounts, but has not issued guidance for 1099R reporting that supports such pro rating requirement. Trying to isolate the basis to the Roth IRA is subject to failure should the IRS issue such guidance before the 2012 1099R cycle.
2) Some of the after tax contributions to the pre tax 401k account must also be further assigned to the cost basis of the NUA shares.
For this taxpayer, that means 3 types of accounts to split the after tax contributions (non Roth). The Roth 401k portion is the only straighforward part of this as that balance can simply be directly rolled to a Roth IRA. It does not matter whether the Roth IRA is newly established or existing since all Roth IRAs are combined for tax purposes.
The only way eliminate the uncertainty regarding the pro rating mentioned above is to do the IRA rollovers by indirect rollover, but that requires the taxpayer to be able to replace the mandatory 20% withholding on the pre tax amount, which obviously can be a very large amount to come up with. If the taxpayer can afford it, he would then roll the pre tax amount to a TIRA and then roll the after tax amount to the Roth IRA, replacing the 20% as needed. This would also produce a single 1099R for this distribution including the NUA.
If the taxpayer cannot afford to replace the 20% withholding, then he could roll the dice and do direct rollovers to each type of IRA and hope the IRS continues without specific guidance or he could do a direct rollover of the pre tax amount only and keep the after tax contributions outside an IRA.