401k rollovers to IRAs with pre tax & after tax dollars combined

Submitted by George W Smith IV on Wed, 2015-03-11 15:33

I am running into clients receiving large 401k plan payouts in 2015 upon their retirement from their employer. The 401k plan administrator is facilitating one lump sum distribution (trustee to trustee transfer) to my client’s rollover IRA. This rollover distribution combines their pre tax and after tax 401 k plan accounts. The plan administrators will not facilitate to separate rollover distributions for the pre tax and after tax 401k accounts.
My clients want the after tax dollars to go into a Roth IRA.
Can they transfer the after tax 401k dollars from their rollover IRA to a new Roth IRA?
If so I assume only their after tax contributions would be income tax free and any earnings and appreciation would be taxable as a Roth IRA conversion.
Is any one else running into this and if so how are you handling it?

Thank you.



Submitted by Alan - IRA critic on Wed, 2015-03-11 17:20

  • These plans are not doing their employees any favors. Notice 2014-54 clearly allows plans to accept instruction from employees regarding the destination accounts for various portions of the plan balance.  http://www.irs.gov/pub/irs-drop/n-14-54.pdf. Most plans are now doing this without resisting.
  • Once after tax contributions have been rolled into a TIRA account, they become subject to the pro rate rules as calculated on Form 8606. Once this happens there is no solution.
  • While inconvenient, if a plan refuses to accept more than one destination account, a taxpayer can still go back to two of the former isolation of basis strategies used prior to the Notice. These have both been cleared by the Notice as well. The taxpayer can request a direct rollover of the pre tax balance to a TIRA and the payment of the after tax balance to the employee. The employee can then do a 60 day rollover of the after tax amount to a Roth IRA. And if the plan will not do that either, taxpayer can request a full distribution paid to himself. He can then do the two rollovers, pre tax first and Roth second. The main issue with this method is that 20% withholding is applied to the pre tax portion which forces the taxpayer to replace the withholding from other funds to complete both rollovers. Many taxpayer will not have this money available.
  • Rather than resorting to either of these work arounds, when a plan administrator resists, it may be simply from lack of information. Requests should be elevated to the management level of the plan administrator to address any refusal to execute these direct rollovers as clearly allowed in the Notice.

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