Withdrawing after tax 401k plan funds
I have a client that contributed both before and after tax to his 401k at Old company. He rolled his Old company 401k plan into the New company 401k plan. The rollover consisted of $12k in after tax dollars and $188k in before tax dollars. All of his contributions to the New company plan have been with before tax dollars. The balance of the New company plan is $600k. The New company plan administrator did not segregate the before and after tax dollars at the time of the rollover. My client has good documentation showing the source of the funds. He is now separated from service. He would like to roll his after tax dollars into a Roth IRA and his before tax dollars into a Traditional IRA. Assuming he can get everything straight with the New company plan administrator, how do you calculate the amount that can be rolled into a Roth? Also, are there any ‘heads up’ or timing issues that he needs to be aware of?
Thanks.
Permalink Submitted by Alan - IRA critic on Fri, 2013-04-12 04:01
There are many issues with “basis isolation”, as the IRS wants direct rollovers taxed as if the balance first when to a TIRA and then was converted using the pro rate math of Form 8606. That said, many taxpayers have been able to isolate basis for 3 years now due to lack of IRS guidance to plan administrators regarding 1099R forms. If client wants to try doing this by twin direct rollovers, it may be best to wait until mid November after which the IRS is unlikely to issue new guidance for 2013 1099R forms. There is also a safe way to avoid pro rating, but it involves the client taking a distribution of the full balance, replacing the withholding and doing the TIRA rollover first and the Roth (12,000) second. Since 20% of 788,000 pre tax is 157,600 it is unlikely the client has the liquidity to replace the withholding and do these rollovers. 12,000 is a relatively small amount, so client may wish to just have the 788k go to a TIRA in a direct rollover and have a check sent to him for the 12,000 to keep with his taxable savings.
Permalink Submitted by maddy craus on Fri, 2013-05-03 05:27
It seems like there’s nothing but not so great news going around these days, but then again a lot of it is down to the press just fear-mongering again because it gets ratings. Anyway, there is something to give some people hope, specifically if they have retirement nervousness. Numerous reports revealed that 401(k) policies are starting to make cash again, after years of stagnation.
Permalink Submitted by fairira on Fri, 2013-05-03 22:14
Unless my eyes or computer are misbehaving, the pre tax amount in original post was $188K nd not $788K.
Permalink Submitted by Alan - IRA critic on Sat, 2013-05-04 00:03
He rolled 200k into the plan and stated the new plan balance was 600k. It was not clear whether the 600k includes the 200k or not.