60 Day rollover – Pre and After Tax money
Hoping someone could help answer with the following scenario.
Had a client receive one lump sum distribution from his employer retirement plan directly payable to him (not custodian FBO) No taxes were withheld on the lump sum distribution. The single Lump sum distribution contained pre tax money and after tax money.
Can the individual do an indirect rollover with the 60-day rollover rule to put that money into their Traditional IRA for the pretax money and put the after tax money into their Roth IRA? If they can is there certain steps that has to be done?
I am unclear if they can do both or have to pick just one (the Traditional IRA if they don’t want the pretax money to counted as income) and roll the after tax money into the traditional as well. Thank you for all your help!
Permalink Submitted by Alan - IRA critic on Tue, 2021-03-23 17:52
There should be mandatory 20% withholding if the distribution is eligible for rollover. This isn’t a non govt 457 plan is it? Once client is sure that this distribution is actually rollover eligible, they can split the rollover to TIRA and Roth IRA destinations, however there is a rule that states that the first funds rolled over are the taxable (pre tax) funds. Therefore, once client is very sure of the pre tax and after tax amounts client should roll the taxable amounts to a TIRA prior to rolling the after tax amounts to the Roth. About a two day delay should be sufficient. It would be a costly mistake to roll the after tax amounts to a TIRA.
Permalink Submitted by Peter Flander on Wed, 2021-03-24 13:32
No mandatory 20% was witheld because it came from the NATO retirement plan (an IGO) NATO would not split the distribution directly to the Tradtional IRA and Roth IRA. They would send it all to the Traditional or to the individual bank account and provide the after tax portion not subject to taxes for client tracking.