Rollover to a ROTH IRA

Submitted by tim augustine on Mon, 2013-03-18 14:11

A recent retiree wants to rollover his 401K into an IRA. He received one check payable to the new IRA custodian. The documentation that came with the check provides the amount that include the pre tax and after tax contributions to the 401K plan.

Can he roll the after tax portion of the check into an ROTH IRA account?



Submitted by Alan - IRA critic on Mon, 2013-03-18 17:51

There are some problems in doing that:

  1. There will be a single 1099R showing -0- taxable since the plan will assume no part of the direct rollover was intended for the Roth IRA.
  2. The IRS indicated in Notice 2009-68 that pro rating of basis should apply when direct rollovers are split between IRA types. The way to get around that would have been to have the check made out to the retiree and have the retiree replace the withholding and do indirect rollovers, TIRA portion first.
  3. Even if the IRA custodian was willing to split the rollovers (check did not not specify IRA type?) between IRA types, there is a good chance the IRS would challenge retiree’s tax reporting based on 1) and 2) above.
  4. The result of the current direct rollover would be that the retiree would have basis in his IRA to the extent of the after tax contributions. He would file Form 8606 to report that basis on line 2 the next time an 8606 would otherwise be required, eg the next distribution.

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