Non-Taxable portion of 401k
I have a client that rolled over her 401k and the provider sent out two checks, non-taxable and taxable which one is made out as FBO of my client and the other one directly to the client. Trying to figure out what her options are are? 1. Roll the non-taxable amount into the IRA but track that it is after tax dollars so she doesn’t get taxed again on the way out. 2. Take that check and do a contribution into the IRA for tax deduction. 3. Contribute to a Roth IRA. 4. Just sign the check and put it in the bank or non-retirement account because it has already been taxed.
Permalink Submitted by Alan - IRA critic on Mon, 2021-02-01 18:04
Check that the FBO check is the pre tax portion of the 401k plan, and send it to the TIRA custodian as a direct rollover contribution.
Client will then know that the check payable to client was the after tax balance. Normally, that would be rolled over within 60 days of receipt to a Roth IRA. However, if client needs these funds for current spending needs, she can deposit the check into her checking account and use the funds. This distribution will be non taxable since the 1099R received next January should show 0 in Box 2a.
If rolled to her Roth IRA, it will be tracked in the Roth IRA as a non taxable conversion, and can be distributed without tax or penalty, but only after regular contributions and older conversions are distributed. But if she has a qualified Roth IRA (5 years and she is 59.5), there is no need to track this rollover contribution.
The Roth IRA is the best decision in most cases, since this money will generate potentially tax free earnings in the Roth IRA and there will be no RMDs.
Be sure the after tax distribution is not deposited into her TIRA, as that has at least 2 negative consequences.