401k After tax dollars rollover to Roth IRA

Submitted by Howard Hook on Thu, 2013-12-12 01:01

Hi all,

Client has after tax and pre tax money in 401k plan. Can he roll the after tax money to a Roth IRA and the pretax money to a Traditional IRA? 401k custodian requires that the pre and post tax monies be rolled over at the same time.

I have read previous posts discussing whether pre and post tax dollars in 401k can be split with after tax dollars going to the Roth IRA (no tax on conversion of after tax dollars)and pre tax dollars going to Traditional IRA but wanted to be sure nothing has changed.

Thanks as always

Howard



Submitted by Alan - IRA critic on Thu, 2013-12-12 02:15

Nothing has changed. If the plan will do a direct rollover to each type of IRA, the risks are very low that there will be a problem. But it is still somewhat safer to take a full distribution, replace the 20% withholding from other funds, and then roll the proceeds over within 60 days to the TIRA and then to the Roth IRA for the post tax amount.

Submitted by Howard Hook on Thu, 2013-12-12 02:30

Thanks Alan. Two quick followups if I can:Why does taking the full distribution /replacing the  20%withholding  and rolling it over to both the TIRA and Roth work? Does the order of the rollover matter? (TIRA first and then Roth)What if he first rolled the after tax portion to the Roth 401k inside the plan ? Then could he roll the Roth 401k to a Roth IRA and the Pre tax portion sitting in the regular 401k to a Traditional IRA?Thanks!Howard  

Submitted by Alan - IRA critic on Thu, 2013-12-12 04:53

  • He could do as you indicated if the plan allows in plan Roth rollovers and they allow only the after tax amounts to be rolled over to the Roth. Otherwise there will be taxes due.
  • With respect to the procedure I described as safer that includes withholding replacement, this is specifically allowed in tax code Sec 402(c)(2), but requires a distribution made to the EMPLOYEE. The code then states that the first dollars the employee rolls over are deemed to be the pre tax portion. That is why the TIRA must be funded first.

Submitted by Howard Hook on Thu, 2013-12-12 12:14

Thanks Alan Howard

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