Large 401k with Pre-87 Post 86 Basis/ Earnings

Submitted by Krista McBeath on Thu, 2023-07-13 21:22

We have dealt with this before, and read extensively, but always appreciate some reassurance when dealing with large transactions. The account is nearly $1.2m with the following breakdown:
After Tax Details
Pre-1987 Basis: $20,958.29
Pre-1987 Earnings: $57,790.77
Post-1986 Basis: $42,364.31
Post-1986 Earnings: $116,809.08

The employer only wants to issue one rollover check and then a check to the participant for the after-tax amount. They will mandatory WH 20% on any taxable amount, but there is not plan to have that distributed. Our thought is that the pre-tax contributions, pre-tax earnings, earnings on the pre-1987 and Post-1986 will all be rolled over to her IRA. Then, $63,322.60 can be sent to her, and she can use and indirect rollover to Roth.

Is this accurate?

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Permalink Submitted by Alan - IRA critic on Thu, 2023-07-13 22:06

Yes. Either the entire pre tax amount can be directly rolled to a TIRA, and the after tax amount distributed to participant who then does a 60 day rollover to their Roth IRA OR a split direct rollover is done with pre tax to TIRA and the after tax balance to the Roth IRA. The latter saves a step. Either way, no current taxes are due and no withholding should be taken.
Note that after separation from service, the breakdown of basis pre 87 and after no longer matters.
If the plan prefers to issue a check for the basis to participant, it makes sense to proceed that way since the plan is accustomed to this procedure and therefore the preferred procedure is probably less error prone. Last thing you want is to have the basis deposited to the TIRA in error.