401k Question

Submitted by Jason Hochstadt on Fri, 2015-10-09 20:25

Hello,
Assume an individual has a 401(k) Plan with money types of both a pre-tax (Traditional) and after-tax (Roth) nature. At retirement or upon leaving their job, when the individual goes to roll-over the funds out of the 401(k) Plan, since the Plan has one ID#, how do they effectively roll the Traditional monies into a Traditional/Rollover IRA and the Roth monies into a Roth/Rollover IRA. The monies are segregated in the 401(k) Plan but there are not separate Acct. #s. Accordingly, how would/should the above be accomplished? Thank you. Jason



Submitted by Ben Meyer on Sat, 2015-10-10 02:36

  • When the 401(k) recordkeeper makes a distribution, they will issue a form 1099-R during January of the following year.  The form will contain a code in box 7 that indicates the type of distribution.  The total amount of the distribution will be shown in box 1, and the taxable amount will be in box 2a.  For distributions from a 401(k) account the recordkeeper will determine the portion of the distribution that is taxable, and will show it in box 2a.  Separate distribution codes are used to distinguish a distribution from a traditional 401(k) account from a distribution from a Designated Roth 401(k) account.  For a distribution from an IRA, the custodian cannot determine the taxable amount, since the recipient may have more than one IRA account, so they will check box 2b, indicating “Taxable amount not determined”.  The IRA participant will determine the taxable portion of the distribution using form 8606, unless the distribution is rolled over within 60 days.  
  • The account number at the 401(k) plan is not relevant here.  The coding in the form 1099-R completely describes the nature of the distribution.  The account number is only required to be shown on form 1099-R if the same institution or employer is making distributions from more than one account of the same person.
  • You should be aware that a traditional 401(k) account may also hold after-tax contributions.  This can occur where an employee has made voluntary after-tax contributions to a regular 401(k) (non-Roth).
  • The receiving institution of a direct or indirect rollover from a 401(k) account will issue form 5498 the following year.  The deadline for issuing form 5498 is May 31 of the following year, but some institutions will issue these forms earlier, in January, if an RMD is also required.  The form 5498 will show the receipt of the funds rolled from a 401(k) plan, and will describe the rollover as a regular rollover or a Roth rollover.  Form 5498 also reports several other types of events involving the deposit of funds into a receiving institution, and also reports the fair market value, which is used in calculating the RMD for the year.


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