Question on direct Roth conversion from Qualified Plan
If a client has a 401(k) balance which consists of after-tax contributions, as well as before-tax contributions and gains, traditionally I have advised them to pull out the after-tax contributions into a Non-Qualified account, and follow a tax-efficient investment strategy for that money going forward. However, now that it is 2008 and qualified plan balances can be converted directly to a Roth IRA, without having to roll it into a Traditional IRA first, I wanted to know if we could do the following in that circumstance: roll the before-tax contributions and gains into a Traditional IRA, and then convert the remaining qualified plan balance (which now consists of only after-tax contributions) to a Roth IRA, thereby avoiding paying any tax on the Roth conversion of the after-tax contributions?
Permalink Submitted by Alan Spross on Sun, 2008-01-27 22:57
I think we will have to wait until the Regs. are published on the direct Roth conversion before knowing if this is possible. All distributions of post 1986 after tax contributions must come out pro rated with pre tax amounts, and this would prevent the ability to do the Roth transfer later, but it might be possible to direct the funds to the appropriate IRAs during the same distribution. The plan would have to authorize at least two transfers for that do work.
Similarly, when the Regs are released, we will know if the pre 1987 after tax contributions can be transferred to the Roth IRA up front, but that solution would only work for the pre 1987 after tax amounts.
Hopefully, the IRS will get to these Regs soon as I doubt if there will be any direct Roth transfers until guidance is released.