401k Rollover Qs Pre and Post Tax

Submitted by Gary Vyneman on Fri, 2013-06-21 20:32

I have a client that is getting a distribution from a former employer 401k: 50% is pretax contributions plus appreciation and 50% is after tax appreciation, and is going to receive 2 rollovers for each. I have the following Qs:

1. Assuming we do not want to roll after tax into Roth (due to 2009-68 and not having extra cash to make up the tax withholding), should we separate the two rollovers into two separate IRAs-the thing that I am unable to determine is if due to Notice 2009-68 we should do just one IRA since there would be the potential for pro-ration of basis to both Rollovers hence why not just do one RO IRA?

2. Regardless of whether one or two IRAs should be set up, how would the reporting need to be done–would the employer 1099 each rollover to designate one as pre and one as after tax? Should we file an 8606?

3. My custodian (Schwab) has said that they will be unable to track the pre and post tax dollars to be able to pro rate when the eventual distributions get made? is that the experience that others have had with theirs?

Thanks Much! for the Help!



Submitted by mk foss on Mon, 2013-06-24 02:40

I’m not answering all of your questions but there are somethings that you need to be aware of:

  1. The appreciation on pretax earnings is treated the same as the appreciation on after tax earnings. If your try to treat them separately, it’s an exercise in futility.
  2. Custodians are not required to keep track of pre-tax and post-tax amounts in IRAs whether they are created from contributions or rollovers. I know of no custodian that would even attempt such a thing.
  3. All IRAs are treated as one for purposes of determining the taxable portion of a rollover or a distribution. There may be a reason to have more than one IRA (different beneficiaries for example) but there is no tax reason to keep them separate.

Submitted by Alan - IRA critic on Mon, 2013-06-24 03:24

Re Q 2 – The employer should follow the IRS 1099R Inst. That results in adding up the distributions on a single 1099R per plan unless the coding requires more than one.  Multiple 1099R forms will result in a direct rollover is done for part of the balance and the rest is paid to the employee. An 8606 is only needed if basis is added to the TIRA by either direct or indirect rollover. If basis is rolled to a Roth IRA, then the challenges of 2009-68 kick in, although the IRS has done nothing to date to follow up on 2009-68. No 8606 would be filed in that situation or in the case where the employee  simply kept the post tax money in a taxable account. Some employer plans will report report twin rollovers on one 1099R with no taxable amount in Box 2a which amounts to ignoring 2009-68, but no consequences of this so far.

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