Rolling Over Pre-paid Tax Dollars

Submitted by S Baukol on Tue, 2013-11-05 23:47

This is for a 67 year old female that has no wages. I am wondering if there is a way we could rollover the pre-paid tax dollars from a deceased husband’s 401(k) into a Roth IRA and avoid the income tax, since they have been paid. The check has already been cut from the custodian last week.



Submitted by Alan - IRA critic on Wed, 2013-11-06 04:16

  • If the check is made out to the surviving spouse there will be 20% withholding sent to the IRS. She will get 80%, and within 60 days she can roll some to a TIRA which would not be taxable, and some to a Roth IRA, that would be a taxable conversion. She can split this up as she wishes, but to complete the rollovers she has to make up the 20% that is missing from the check.
  • If the check is made out to an IRA custodian (a direct rollover), there is no 20% withholding taken. But does the check indicate payee is a TIRA or a Roth IRA? If the entire amount goes to a Roth IRA, the entire amount will be taxable.
  • Note that there might also be an RMD due for the year of death is husband passed after his required beginning date. Such RMD cannot be rolled over.
  • Above assumes the rollover is all pre tax, but you indicate taxes have already been paid. It is highly unlikely that the entire 401k is composed of after tax contributions, but if a portion is after tax, there would be no taxes for such portion that is converted to a Roth IRA. The breakdown of pre tax vrs after tax must be identified, and also how the check is being made out.
  • It may be possible to “isolate the basis”, ie have the pre tax amount rolled to a TIRA and the after tax amount to a Roth IRA tax free. But this is touchy due to IRS policy, and I would need to know the above details to get into those options. 

Submitted by S Baukol on Wed, 2013-11-06 17:35

Hi, thank you for the reply. Here’s a little bit more details of this particular situation: $450k is taxable and has been made out to an IRA Custodian. $50K has been made out payable to her, as the only option available (non-taxable money). Can that $50k go into a Roth IRA? If so, how? Again, she has no wages.

Submitted by Alan - IRA critic on Wed, 2013-11-06 18:25

Within 60 days of receipt of the check, she can PROBABLY roll the 50k over to a Roth IRA. While the IRS has indicated in a 2009 Notice that pro rating of this basis should apply to both IRA rollovers, there has been no follow up or instructions to the custodian to reflect this on their 1099R reporting. Accordingly, taxpayers have been doing these rollovers for the last 3 years without challenge from the IRS. It is now too late for the IRS to issue instructions to custodians for 2013, so she will almost surely not be questioned should she execute this tax free rollover to a Roth IRA. She will get a separate 1099R for this after tax distribution with nothing in Box 2a (the taxable amount). She would then report the rollover on line 16a and 16b of Form 1040.

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