IRA Rollover of After Tax Pre-1987 401(k) Assets

Submitted by Allan S on Thu, 2015-03-05 19:47

Upon my retirement in March 2014, I promptly rolled over my entire 401(k) assets at one major investment manager into a single Rollover IRA at another major investment manager.

I was not aware (record keeping was limited and investment managers had changed) that my 401(k) account also included after tax pre-1987 assets until after my Rollover IRA had been completed. My 1099-R subsequently received showed a total distribution in Box 2b, but Box 5, regarding Employee Contributions, did not show my after tax pre-1987 assets. My prior 401(k) employer plan has now terminated with all of the 401(k) assets transferred and included as part of a larger 401(k) plan.

Three questions: 1) Am I now precluded from having these after tax pre-1987 assets (now contained in the Rollover IRA)ultimately transferred into a Roth IRA? 2) Could I now seek to transfer the total distribution of Rollover IRA assets back into the 401(k) plan (assuming the plan would permit) and then split these assets into a Rollover IRA and a Roth IRA? or 3) Would the IRS permit me, after making a specific IRS letter request, to have the after tax assets transferred into a Roth IRA based upon my circumstances?

If success is possible, there is motivation on my part to further pursue this matter by taking necessary actions following IRS acquiesces under IRS Notice 2014-54. Thank you very much for your thoughts.

ARS



Submitted by Alan - IRA critic on Thu, 2015-03-05 20:00

  1. Yes, it is unfortuneate the Notice 2014-54 was not issued until Sept, 2014. Once your after tax amounts are rolled to an IRA, they are commingled as IRA basis over all your non Roth IRA accounts. You should record the basis on Form 8606 line 2 in the next tax year you would otherwise file an 8606. Also, secure a copy of the plan statement showing your after tax total before the rollover in case the IRS asks about the 8606 you will eventually file. It is a flaw in the 1099R reporting system that Box 5 is not completed for direct rollovers to TIRA accounts. HOWEVER, if your current 401k will accept IRA rollovers, you can roll the pre tax total (not the basis) of your non Roth IRAs into the plan. That will leave only the after tax basis in the IRA which you can then convert tax free.
  2. No, just the pre tax IRA amounts into the 401k. A 401k plan CANNOT legally accept IRA basis in a rollover.
  3. You do not need an expensive letter ruling to do the above. And if the 401k will not accept an IRA rollover it would be a waste of time, money and effort to file a PLR request. I have not heard of anyone attempting to secure such a ruling.

Submitted by Allan S on Fri, 2015-03-06 20:28

AlanThank you for your prompt and excellent responses regarding the after tax assets in my IRA Rollover.  I’ve been thinking about your responses during the past 24 hours and have the following additional questions of clarification. First, I am now retired and not likely to have a full time position with an employer that has a 401(k) plan in the future. When you state in the first paragaph “your current 401(k),” I assumed you mean a new 401(k) plan with a new employer which would not include seeking to redeposit the pre-tax assets back into my old employer’s 401(k) plan which may not be even possible as I am no longer employed by my former employer. Second, I will be seeking to perform various services in the future as an independent contractor and perhaps perform some consulting services.  I was intending to set up a retirment plan.  In reviewing, one option would be to set up my own Self Employed 401(k) plan subject to the additional legal requirements imposed. This type of Self Employed 401(k) would seem to permit in due course the rollover of pre tax IRA rollover assets into the Self Employed 401(k). Third, I understand that a SEP IRA would not work even though the published IRS Rollover Chart permits a Traditional IRA to be rolled over into a SEP IRA.It seems that a Self Employed 401(k) plan would be my best approach as I contemplate my future work situation to separate out the pre tax and the after tax amounts. Thank you again for your thoughts in helping me fully understand your comments.  Alan, you have been very, very helpful!ARS 

Submitted by Alan - IRA critic on Fri, 2015-03-06 22:55

Yes, you would likely need a new employer 401k plan in order to roll pre tax IRA money into such a plan. Your own solo 401k plan drafted to include rollover provisions could also be used, and many people do this. Finally, you are right about a SEP IRA not being useful to accept the rollover because it is still an IRA and the balance must be included on the 8606 for pro rating. Sounds like a solo K is the only solution to isolating the IRA basis so you can convert it.

Submitted by Allan S on Fri, 2015-03-06 23:26

Alan, thank you again for your thoughts regarding my questions.  You have been very helpful in “de-mystifying” this area of retirment planning.I am also becoming a fan of this website to learn more about how a retirement plan should best be structured to achieve the desired results. ARS

Submitted by Charles Rizzo on Wed, 2015-12-02 15:59

Pre 1987 403b contributions were rolled into an IRA along with pre tax 403b contributions. The 403b separately accounted for the basis of the 403b contributions.1. Can the basis portion of the pre 1987 contributions then be rolled into a ROTH?2. If yes, how should that be done and accounted for?3. If no, what options, if any, does the taxpayer have?Thank you.

Submitted by Alan - IRA critic on Wed, 2015-12-02 19:48

Once basis from a qualified plan is rolled into an IRA, it can no longer be separated out for conversion purposes. All that can be done is to file Form 8606 for the next IRA conversion or other distribution showing the amount of after tax 403b contributions that were rolled into the IRA. That will result in the pro rate rules of Form 8606 determining how much of a conversion is non taxable.

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