in service withdrawal of after tax account of 401k
Employee is over 59 ½ yrs of age and wishes to process an in service rollover from her 401k.
Her 401k consists of pre tax contributions, Roth contributions, and after tax contributions.
The administrator will process the rollover of her pre tax and Roth 401k values by having two separate checks made payable to the financial institution where the IRAs are held.
The administrator of her 401k will process the in service rollover of the after tax account by separating the earnings portion from the after tax contributions and adding the earnings portion to the check representing the pretax 401k value and the after tax contribution will be delivered to the employee in a check made payable to her.
It his her objective to then deposit the check that represents her after tax contributions (that is made payable to her) into her Roth IRA.
Are you aware of any problems that can arise as a result of the check that represents her after tax contributions being made payable to her, given her objecgtive is to deposit it in her Roth IRA?
Permalink Submitted by Alan - IRA critic on Mon, 2021-10-18 23:07
All of these transactions are allowed by the IRS, but the 401k provisions will determine whether the entire plan can be distributed while still in service or only certain portions. Employee should verify as much as possible that the values rolled over pair up with the plan balance allowed to be distributed, and match up with the receiving accounts. This should result in a G coded 1099R for the pre tax amount rolled to a TIRA, an H coded 1099R for the Roth 401k balance directly rolled to the Roth IRA, and a 7 coded 1099R for the after tax non Roth balance distributed to her. None of these distributions should have a taxable amount which would show up in Box 2a of any of the 1099R forms. As long as there are no execution errors, this should turn out fine.
If these direct rollovers are being mailed to employee to be re directed by employee to the IRA custodian, employee should make a copy of each check and make sure the amounts are correct before forwarding. Ideally, the pre tax check should be made payable to the IRA custodian “FBO employee name IRA” and Roth custodian “FBO employee name Roth IRA”. This should reduce the chance of a deposit switch where the checks go into the wrong type of IRA. Employee should then verify that the actual deposit amount to each IRA was correct. Any errors that are caught early can usually be fixed, but if discovered many weeks or months later on it might be very difficult.
Employee can also do a 60 day rollover of the after tax check to her Roth IRA, flagging the deposit as a rollover contribution. Since the Roth IRA will be receiving both Roth 401k dollars and non Roth after tax dollars, employee need to update her Roth IRA basis if her Roth is not already qualified. If already qualified, the entire new Roth IRA balance will also be qualified and entirely tax free if distributed. Employee must be careful to make sure this after tax distribution goes into her Roth IRA and not into the TIRA by mistake.
Just alot of moving parts, so extra care is needed to check that no errors occurred.