Roth in plan conversions

Submitted by Scott Gorham on Wed, 2015-04-22 18:39

I have a retirement account that has Pre tax employer contributions, pre tax 401K (my) contributions, rollover money within 1 account. All of the money is comingled. Contribution percentages are applied to any withdrawals for determining the source of the funds. For instance, 40% 401k, 50% employer contribution and 10% rollover contributed then those percentages are applied whatever balance when money is withdrawn.

If I do an in plan Roth conversion am I only able to do the conversion with 401K funds and not the employer contributions? The Employer contributions go into a money plan type of account ( I believe)
Thank you.



Submitted by Alan - IRA critic on Wed, 2015-04-22 19:15

  • IRRs are very tricky. It sounds like you are still working for this company. The plan has the option whether to offer IRRs at all or whether to offer them on what are called “distributable amounts” or limit IRRs to ONAs (otherwise non distributable amounts). Your own elective deferrals (the 40%) cannot be distributed to you while in service (other than hardship distributions) before age 59.5 from any plan. Other than that, the plan has the option to determine what components of the plan are distributable and when, so I cannot tell you what components of this plan are eligible for an IRR. or even after you do an IRR what portions of the IRR would then be distributable. After you separate, then the entire balance becomes distributable regardless of age.
  • There are certain elements of your plan that may appear commingled on your statements, but legally cannot be commingled. Since you know the %s, the plan is obviously continuing to track the value of various components of the plan. A designated Roth must be added to the plan before an IRR can be offered, and these must always be held in separate sub accounts within the plan. And if you do an IRR with both distributable and non distributable amounts, the plan must account for those balances separately. Otherwise, they would not know how much of your balance was available for in service distributions.
  • Be very careful with IRRs. While they are similar to Roth IRA conversions, they CANNOT be recharacterized. So if the value of your IRR drops significantly you are still stuck with the tax bill. Of even if it does not drop and you cannot afford to pay the taxes, you are still stuck with the tax bill. And since designated Roth distributions are subject to less friendly taxpayer rules, if amounts of your plan are distributable I would directly roll them over to a Roth IRA rather than doing an IRR given the risks and tax disadvantages. About the only advantage of an IRR would be if you live in a state that does not protect IRAs from creditors and you need ERISA creditor protection that a 401k receives.


Add new comment

Log in or register to post comments