after-tax 401k rollover to Roth IRA
Sir/Madam,
I have a client with a $750,000 balance in a 401k account. $11,000 of this represents the after-tax contributions he has made. This $11,000 has grown to $100,000.
The plan administrator is willing to issue 2 separate checks: 1 for all of the pre-tax funds ($739,000- payable to TIRA) and 1 for the after-tax funds ($11,000- payable to Roth).
If we roll the $11,000 directly to a Roth IRA is the “conversion” tax-free? Or, would we need to use this formula:
11,000 (amount converted) x [11,000/100,000 (after-tax account balance)]= $1,210 (tax-free conversion).
Or is it something different?
Thank you in advance.
Permalink Submitted by Alan Spross on Thu, 2012-10-04 16:51
If the plan issues the 1099R reporting these direct rollovers with -0- in Box 2a (the taxable amount), it is likely that the basis of 11,000 will be successfully allocated to the Roth IRA.
However, this still conflicts with IRS Notice 2009-75 (pro rating of basis) but the IRS has never changed the 1099R Inst to support the Notice. In about another month it will be too late for the IRS to provide changed instructions to employer plans on how they should issue the 1099R for 2012 since plans will already have finalized their data reporting for this year.
These implications are the same if the client did a direct rollover of the 739k to a TIRA, and received a check made out to him for the 11k which he would then roll to a Roth IRA himself. The only difference in that case would be that two 1099R forms would be issued. Again, if -0- shows in Box 2a for the 11k distribution, client would accomplish the same thing as above.
There is always some risk that the IRS will resolve the inconsistency in an unexpected manner. But it has been 3 years now without any IRS follow up to their 2009 Notice. Therefore, it is well worth it for the client to pursue this because the downside is limited. If something went wrong that resulted in pro rating the Roth rollover such that it was almost fully taxable, client could recharacterize the rollover to avoid the tax bill.
NOTE: If pro rating was required, then only $161 would be tax free (11/750) X 11,000 = $161.