Retirement Savings and Benefits
Questions and comments about IRAs, 401k accounts, social security, and other forms of retirement savings and benefits.
post-retirement 401k conversion to a Roth
Posted by: Retired, May 11, 2009 08:51PM
I have a 401k with Vanguard that I would like to rollover to an IRA avoiding any current tax consequences. Inside that 401k I have both “pre-1987 after-tax” contributions and “post-1986 after-tax” contributions.
I would like to move the bulk of my 401k to a ROLLOVER IRA. However, I have the following questions about the after-tax contributions and its earnings:
1. Can I move the pre-1987 after-tax CONTRIBUTIONS to a ROTH IRA without any tax consequences?
2. Can I move the EARNINGS from these pre-1987 after-tax contributions to a ROTH IRA without any tax consequences?
3. Ditto question #1 for the post-1986 after-tax CONTRIBUTIONS.
4. Ditto question #2 for EARNINGS on the post-1986 after-tax contributions.
5. If moving EARNINGS if not possible without tax consequence, can I just move the after-tax CONTRIBUTIONS alone (either 1987, 1986 or both) to a ROTH without tax consequence?
6. If not possible from a 401k does it make any difference if I did the Roth transfers from a ROLLOVER IRA if I moved the entire 401k there first?

Re: post-retirement 401k conversion to a Roth
Posted by: Alan S., May 12, 2009 02:19AM
1. Yes, this should be allowable as long as the plan has separately accounted for these. Check your statement. You would make this conversion first, but the 100,000 modified AGI limit applies until the end of 2009.
2. No. The earnings are considered pre tax and part of your pre tax balance. There is no significance to pre 87 or post 86 earnings.
3 &4. More complex issue because the IRS has not clearly ruled on this. Most experts feel that these contributions must come out pro rata with pre tax amounts and therefore there is only one relatively clear way to get the after tax amounts ONLY transferred to a Roth. This involves taking a distribution rather than a direct rollover and then taking advantage of the ruling that that amounts that you rollover yourself are considered first to be pre tax. So you would first roll over the pre tax amount to a TIRA, leaving the after tax amounts for a Roth rollover. There is one BIG problem here though and that is having the money to replace the 20% mandatory withholding on the pre tax amount that the plan must withhold.
5) Yes, pre 87 after tax amounts only. See #1 above.
6) Once the 401k is rolled to an TIRA, you can convert from there, but the conversion would be pro rated between your pre tax IRA balance and your after tax balance shown on Form 8606. You would report the after tax rollover on the 8606 in the same year you did your first distribution or conversion from any of your TIRA accounts.

You could also wait for further clarity to see if the IRS rules clearly with respect to balances other than the pre 87 after tax contributions. I would expect something before year end. Right now the only IRS rules on direct Roth conversions are in Notice 2008-30.

Re: post-retirement 401k conversion to a Roth
Posted by: Retired, May 13, 2009 05:25PM
Complex! - our government at work! Thanks for your help. An IRS agent told me yesterday in a face-to-face discussion that there is no difference between pre- and post-1987 and I should be able to move these after-tax contributions (but not earnings) to a Roth with no problem. (Realible advice? - I don't know.) I will move both after-tax piles to my existing Roth.

Re: post-retirement 401k conversion to a Roth
Posted by: Alan S., May 13, 2009 09:15PM
Here is Kaye Thomas' article on the subject:

It does not get into the pre 87 after tax contribution issue, but does apply to the rest of your question. It may be worth it to wait for further IRS guidance if you have substantial after tax amounts in the plan. You will want to them into a Roth in the most efficient way possible, but on the other hand, converting everything will probably result in a marginal rate on the taxable portion being too high vrs your expected tax rate in retirement.

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