Roth IRA

[geekgirldany]

I have a client that is wanting to take after tax money from a 401K and put it directly into a Roth. He said something about in the 1970s you could choose pretax or after tax contributions.

He is in a higher income bracket so the rules would really help him if he could do this.

Does anyone know of a reason why he could not do it?

[ChEAr$]

I have a client that is wanting to take after tax money from a 401K and put it directly into a Roth. He said something about in the 1970s you could choose pretax or after tax contributions.

He is in a higher income bracket so the rules would really help him if he could do this.

Does anyone know of a reason why he could not do it?

I think that it is only comparatively recently (within last 2, 3 years) that this has
been possible and does not stem from the 1970's when we didn't have ROTH IRA's!

[Lion]

Ratio

Any distributions from a traditional IRA will be in the ratio of after tax/pre-tax as is the ratio in all of his traditional IRAs. So, he cannot convert only his after tax contributions from his IRA into a Roth -- unless he has only after tax contributions in all of his traditional IRA accounts.

[geekgirldany]

Thank you both for posting.

ChEAr$ I guess I did not put that sentence very well. He was talking about in the 1970s there was an option with 401Ks to contribute to them with after tax money instead of pretax.

Lion he said that his 401K is made up of pretax and aftertax contributions. He showed me a statement and it said aftertax contributions. So I guess there won't be a problem with him drawing it out.

[Jesse]

I have never dealt with this issue, but I would be careful if advising he can convert the after tax to a Roth without any taxable consequences.

Like an IRA with deductible and nondeductible contributions you can't segregate which contributions you are withdrawing, but it is always a % of your total value that is nontaxable.

Maybe someone with more knowledge will chime in?

[Grace]

I have a client that is wanting to take after tax money from a 401K and put it directly into a Roth. He said something about in the 1970s you could choose pretax or after tax contributions.

He is in a higher income bracket so the rules would really help him if he could do this.

Does anyone know of a reason why he could not do it?

I have seen 401(k)'s with "after tax" monies. When the taxpayer withdrew their "after tax" money, it was reported to him on a 1099R (Box 1: Gross Distribution: 1,000, Box 2: Taxable Amount: $0, Box 2b marked "total distribution", Box 5: Employee Contributions: $1,000, Box 7 was coded as "7" ..this taxpayer was over 59 1//2). So these exist, albeit not very common.

I would investigate possible penalty for under age 59 1/2, if applicable, as my client was over 59 1/2.

My client was no longer working for the employer, he had left 401(k) on deposit. That means that if your TP is still employed at the firm they may or may not allow and "in-service withdrawal". Also, I'm not sure about a "direct transfer," taxpayer may have to take monies and then deposit in ROTH.

You say your client is in a "high income bracket." Not sure how ROTH helps lower current tax...unless you mean that he'll benefit from ROTH by having the ability to withdraw it later with no taxes? And, ROTH contributions still have income limitations (income limitations were only eliminated for conversions).

That's all that come to mind at this time...hope it helps.

Grace

[geekgirldany]

Thank you all for posting more information.

There are income limitations on doing a conversion. So MAGI has to be $100,000 or less. In 2010 there is no restrictions. My client makes over $100,000. He is also 65.

So his after tax contributions may or may not have earned additional included. If this is true then he will have to pay tax on the investment income earned. This can be spread out into 2011 and 2012.

I believe what he is really looking at is the original income restrictions.

I'll find out if there are any employer restrictions on pulling the money out and direct transfers. TTB states starting in 2008 money from a 401K can be directly converted to a Roth.

Jesse I always tell them to double check with their financial advisors. I don't want it coming back on me later.

[Lion]

Roth 401(k)

If he's still employed, have him check his employer for a Roth 401(k) option. I would think the direct transfer to that would be easier for him to track, maybe simpler paperwork, if another option at the same employer. Then, when he separates from service or if his employer allows in-service withdrawals, he can move the Roth where ever he wants.

[ChEAr$]

If he's still employed, have him check his employer for a Roth 401(k) option. I would think the direct transfer to that would be easier for him to track, maybe simpler paperwork, if another option at the same employer. Then, when he separates from service or if his employer allows in-service withdrawals, he can move the Roth where ever he wants.

Bingo. I think I've heard the answer before.

Simply roll the 401k over into an IRA, and THEN convert is into a ROTH IRA.

Will that work?

[Burke]

Thank you both for posting.
ChEAr$ I guess I did not put that sentence very well. He was talking about in the 1970s there was an option with 401Ks to contribute to them with after tax money instead of pretax.Lion he said that his 401K is made up of pretax and aftertax contributions. He showed me a statement and it said aftertax contributions. So I guess there won't be a problem with him drawing it out.

You are correct. He can withdraw the entire amount of after-tax money that he contributed prior to 1986 without incurring any taxation. I did exactly that in 2009 to purchase property. He gets a 1099R showing gross distribution, and "0" taxable. Then, I suppose he can do anything he wants to with it, including depositing into a ROTH if he meets the rules for 2010. It would not be a rollover.

[Lion]

Two steps

Used to have to do the two steps. Now, you can roll directly from 401(k) to a Roth with paying the tax, of course. I just thought if he has a Roth 401(k) at work anyway...

[geekgirldany]

I appreciate the help on this. He has a good bit of money in the after tax. He gave me a listing of what he has through the employer and he does not have a Roth with them. But I will suggest that he looks into that or that he can do a trustee to trustee transfer into a Roth.

[Burke]

Any distributions from a traditional IRA will be in the ratio of after tax/pre-tax as is the ratio in all of his traditional IRAs. So, he cannot convert only his after tax contributions from his IRA into a Roth -- unless he has only after tax contributions in all of his traditional IRA accounts.

Actually you can if they are pre-1986 after-tax contributions. That's when the laws changed. After-1986 contributions are pro-rated. This would apply to 401k accounts.