After-Tax 401k cont. to Roth

Please forgive me if this has been discussed recently, but I am still unclear on whether it is allowable to move after-tax 401k contributions directly to a Roth IRA (assuming the pre-tax portion gets transferred to a traditional IRA).

The last that I had heard, this was somewhat of a gray area. Has the IRS provided any further clarification?

Thank you.



No, the IRS has not clarified this or changed the reporting instructions for the 1099R.

However, if this is done by indirect 60 day rollover, the after tax amount can be rolled to a Roth IRA after the pre tax amount is rolled to a TIRA. This is included in the tax code, but in order to complete both these rollovers the taxpayer must have the money to replace the 20% mandatory withholding on the pre tax amount.

With direct rollovers, the intent of the IRS is to require pro rating to both IRA types of the after tax amount, but have not changed the 1099R Inst. If direct rollovers were done now, the IRS might change the 1099R Inst before they must be issued next January requiring pro rating of the after tax amount.



Thank you for the update.

I am hesitant to suggest to a client that they do a 60-day rollover on an account that is over $600,000, even though they would have the cash needed to complete the rollover.

I guess the only safe option is to receive the after-tax dollars and put them into a non-qualified account?



Certainly, the client could safely do that, but if he does not need the money anytime soon he would be much better off trying to get the funds into a Roth IRA where all gains will be tax free. If the after tax amount is quite small, then it does matter as much.

If the large withholding replacement is the problem, the client could still take a chance on having the pre tax amount done by direct rollover and then getting a check for the after tax amount which he could still roll over to a Roth IRA. People have been doing this for 3 years now with no problems, but even if the IRS required new 1099R guidelines for 2012, and the Roth rollover became partly taxable, the client would likely be able to recharacterize it. There is not much downside for trying.



Thank you for all of your help on this issue. I do have one more question:

If you do decide to do the 60-day rollover, does the pre-tax portion have to be withdrawn before the after-tax portion, or does it just need to be deposited into the T. IRA before the after-tax portion is deposited into the Roth IRA.

In other words, can the whole 401k be taken out at once, and then two deposits made, or do you need to make two separate withdrawals AND two separate deposits.

Thanks again!



The distributions can be done together, but when the rollover is done, the TIRA rollover MUST be first. The Roth rollover can be done the next day, but both within 60 days of the distribution.



Thank you SO much!



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