The sititution is client went into local credit union with a 401k rollover and they in turn rolled it into a Roth IRA. After this they gave her a distribution coded as a Roth dist and paid off her car with some of the other money which they never issued her a 1099r for this amount they used to pay off her car. The kicker is she went in the bank after her meeting with me and they told her I did not know what I was talking about. Am I wrong that this could not be done? I looked on ttb page 13-22 and it seems it can only be done after 12/31/2007.
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I'm not
by any means of the word an expert in retirement plans. But there has been no one else that answered your post, so I thought I'd give you my opinion.
Your client took his 401 and rolled it over into a Roth IRA. (Not a Roth 401). Then the client withdrew some money to pay off something.
The law allows the withdrawal of initial funds invested with no tax or penalty. The part that can not be withdrawn is the portion of interest generated. The client would (or will) have to pay tax on the money taken from the 401 (which is all pre-tax dollars). So that becomes his initial investment.
Is this clear as mud now?? -
A Roth is funded with after tax money. A 401K is funded with pretax dollars. Thus doing such a transfer would make it all taxable because the tax had never been paid on the money when it was put into the 401K. It would be a conversion. You can do a direct transfer from a 401K to a traditional IRS because they both use pretax dollars to fund them. A Roth is a whole nother ball game. Seems to me the transfer should have been to a traditional IRA not a Roth.Comment
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Bonnie,
wasn't the question if he withdrew $ from a new funded Roth, wouldn't it be ok because as you pointed out, he would have (or will) to pay tax on the $ put into the Roth?
Then the withdrawals would be tax paid funds which are allowed with no new tax?Comment
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You are correct
that this treatment was not available until after 12/31/07. Prior to that it had to be rolled into a traditional and then converted into a ROTH. Assuming that was done than the basis in the ROTH becomes the value on the date of conversion, and any distribution up to that amount is a return of basis, and therefore not taxable. However, a 1099R would need to be issued, either way.Originally posted by superman View Post
Maybe your client has mixed some facts somewhere?Comment
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Um, don't you have to keep the conversion money in the Roth IRA for 5 years before you can remove the money penalty free? Unless she is 59 1/2 already.
As it was a 401K, was a portion of it from after tax contributions? Supposedly, some company plans allow that.Comment
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You are correct that after 12/31/2007, you can roll over pre-tax 401(k) contributions into a Roth IRA. However, as the rules state on page 13-22, it is treated as a taxable Roth IRA conversion, meaning the taxpayer has to pay tax on the conversion, the same as you would converting a traditional IRA into a Roth IRA.Originally posted by superman View Post
It should also be noted, however, that if the 401(k) is a Roth 401(k), meaning the contributions are nondeductible after tax contributions, it could be rolled over into a Roth IRA tax free, and then the after tax contributions can be pulled out tax free to pay off a car. This type of rollover has been allowed since the creation of Roth 401(k) plans at the beginning of 2006.
You weren't clear whether the 401(k) is a traditional 401(k) or a Roth 401(k).Last edited by Bees Knees; 03-07-2008, 08:46 AM.Comment
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