Aftertax 401k to new Roth
With respect to the direct Roth rollover that just became available 1/1/08, may a client with aftertax contributions within a 401k, roll all of those monies (regardless of the dollar amount and regardless of his earned income) directly to a Roth IRA? If so, does the second part of the “older” rule still apply that the client would have to roll all of the 401k simultaneously i.e. the pretax, too? Note, I am not asking about being able to roll a Roth 401k to a Roth IRA, but the important distinction I’m trying to clarify is just aftertax monies within a “normal” 401k.
Permalink Submitted by Alan Spross on Wed, 2008-02-06 04:11
We will not know the mechanics for this until the IRS releases their Regs. One thing for sure is that the 100,000 MAGI limit will apply to this until 2010 just like a traditional IRA conversion.
Also, the Roth transfer cannot be done until the employee is eligible for distributions from the plan. Pre 1987 after tax contributions will probably be able to be transferred separately if eligible for distribution, but this needs confirmation. Other after tax contributions that come out on a pro rated basis can perhaps go to a Roth IRA simultaneously with pre tax amounts going to a TIRA, but again this awaits confirmation.
Other issues are withholding on the Roth conversion, and recharacterization mechanics if the employee wishes to reverse the conversion or is not income eligible.
Neither plan administrators nor Roth IRA custodians will be likely to execute these transfers into the related issues are cleared up.