After Tax 401k Rollover Amounts
I have a client that has just severed employment, and has a 401k to rollover. He has $50,000 in after tax contributions and $50,000 in appreciation. The ex-employer is going to cut two separate checks for each amount. Are we able to roll the $50,000 in after tax contributions into an Rollover Roth IRA and the balance in to a Traditional IRA Rollover? And, does it make sense to do this?
Thanks!
Permalink Submitted by Alan - IRA critic on Tue, 2013-06-18 23:37
What about the rest of the account balance, such as the pre tax contributions? If the plan maintains a separate sub account for after tax contributions, it may be possible to just have that amount distributed (the after tax contributions and the earnings only on those contributions). The only safe way to isolate the basis is to request a full distribution instead of a direct rollover. Client would receive 90,000 and 20% of the pre tax amount would be withheld (10,000). Then if client has 10k of other money to complete the rollovers, they can first roll 50k to a TIRA and second, roll the 50k to a Roth IRA including the 10k of other funds. There is a riskier approach of doing tandem direct rollovers and it avoids withholding, but the risk is that the IRS requires the employer to report the 50k of basis as going half to each IRA type. It’s best to do the safer method unless employee cannot replace the 10k to complete the indirect rollovers.
Permalink Submitted by Gary Vyneman on Thu, 2013-06-20 16:40
The $50,000 was inclusive of the appreciation and the pre tax contributions. What would happen if in lieu of contributing the full $50,000 (ie, $10K extra that was withheld) to the Roth IRA he instead just contrbuted $40,000. Thanks for this Alan!