The transfer method you should use is a “direct rollover”, which all plans must offer. With a direct rollover, withholding is avoided and the check is made out to your TIRA account custodian for your benefit. Many plans will mail you the check to forward to your plan.

While you can roll over the entire amount to the TIRA if you wish, you would be better served to have only the pre tax amount included in the direct rollover. The 15k in after tax contributions should be requested as a distribution to you. Since this amount is post tax, there is no withholding, tax or penalty. You should then either use this money for expenses or better yet, roll it over to a Roth IRA tax free. These after tax funds are much better off in your Roth IRA than in your TIRA, where they will be subject to pro rate rules on every distribution. You would make your own check out to your Roth IRA custodian and tell them it is a rollover from your 401k plan. This is basically a tax free Roth conversion.

You will get two 1099R forms – one coded G for the direct rollover and the other coded 1 (not yet 59.5) and showing no taxable income in Box 2a. You should confirm with the plan that the 1099R forms will be issued this way. On your tax return, you would show 615k on line 16a and -0- on 16b with “rollover” entered next to 16b.

It is remotely possible that your plan may want to pro rate the 15k in the direct rollover, due to an IRS Notice in 2009 that has not been followed up. Very unlikely, but that is why you should confirm what the 1099R forms will look like as noted above.

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There has been no further guidance issued by the IRS including guidance for issuers of a 1099R, so uncertainty remains.

For the last 3 years, taxpayers have been able to do tandem direct rollovers (pre tax to TIRA, after tax to Roth IRA) if the plan will use existing 1099R Inst. There would be -0- taxable amount in Box 1a. In another month, it will be too late for the IRS to change the 1099R reporting for 2012 distributions since there will not be enough time for changes to be incorporated into tax reporting software.

However, all along there has been “safe” method to isolate basis per Sec 402(c)2. Under this method, the employee requests a full distribution to the employee in lieu of a direct rollover. The major downside of this is 20% mandatory withholding on the pre tax amount, and the employee will have to be liquid enough to replace the withheld funds to complete the rollovers. The excess taxes are then refunded when the return is filed. After receiving the net of tax distribution, the employee first rolls the full pre tax amount to a TIRA, and when the TIRA records the funds, the last step is to roll the after tax amount with replacement for the withholding to the Roth IRA. This works because the code section states that when a distribution is made TO THE EMPLOYEE and the employee does a rollover, the taxable amount is deemed rolled over first. This method should be risk free, if there is cash to replace withholding.

One alternative if the person is short of cash is to roll over half this year and the rest next year. That reduces the withholding to half as much at one time. But the person may also wish to avoid withholding altogether and take the slight chance that the tandem direct rollovers might be altered by the IRS in some fashion. This chance is reduced by doing these rollovers late in the year when the IRS is very unlikely to change guidance for that year.

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