2008 rules for after tax rollovers to Roth
Do the new rules allow a rollover of only the after tax portion of 401k contributions to a Roth? If yes, will there be any tax ramifications with regard to the before tax contributions left behind in the 401k? Employee is still working, but eligible to rollover the after tax portion.
Permalink Submitted by Alan Spross on Wed, 2008-01-02 23:17
The direct Roth rollover does not change the qualification of an employee for a distribution from a plan. Generally, such a distribution can only be made after separation from service or attaining a designated age.
If the employee qualifies for an in service distribution or if the transfer is made following separation, the treatment of after tax contributions will follow the same treatment as before. That is, unless a plan separately accounts for pre 1987 after tax contributions allowing those amounts to be distributed separately, all distributions are considered pro rated between the plan balance of post or pre tax contributions.
You indicated the employee is eligible to rollover the after tax portion, so this must be only pre 1987 after tax contributions, as the employee would not be allowed to roll over later after tax contributions without also distributing pre tax contributions. IF the pre 1987 after tax contributions were converted tax free to a Roth IRA, the remaining balance would simply have a lower total basis, but would still include the post 1986 after tax contributions, if any.
These rules would be the same whether the rollover was to a TIRA or a Roth IRA under Sec 824 of the PPA. Regs for Sec 824 have not yet been issued and there are a few questions such as handling recharacterizations if the employee is not eligible for the Roth conversion. However, the eligibility of an employee for a distribution is not affected by Sec 824.