Rolling over post-tax 401k money to a Roth

[Joe S.]

I left employment and rolled my pre-tax 401k money into an IRA at Vanguard. They also sent me a check for about $8,000 in post-tax money from the 401k. Is it possible to roll this over into a Roth IRA? With an income of ~$300,000 a year, I am not normally eligible for a Roth IRA.

[retiredjg]

You say the money is post-tax. That could be Roth 401k or after-tax employee contributions. Or maybe something else I don't know about. I would think Roth 401k would have been rolled into Roth IRA automatically. After-tax employee contributions can go into Roth IRA (you probably have 60 days).

The fact that you are not sure what can be done with this money is a bit concerning. Surely the money came with some explanation of what can be done with it?

[Joe S.]

It was after-tax employee contributions into a regular 401K. I didn't want to roll it over into a regular IRA, so I asked for cash. However, I later got the impression one might be able to roll it into a Roth IRA. It didn't come with instructions, just a check. However, the information on their website didn't mention the option of rolling it over into a Roth IRA.

[retiredjg]

As far as I know, it can be rolled into a Roth IRA within 60 days.

We usually talk about this in terms of in-service rollovers instead of after separation. But I don't know why that would be any different. To be sure, you might contact Alan S who seems to know a lot about IRS regs on this issue.

[retiredjg]

With an income of $300k, you might want to look at whether you can use after tax employee contributions in your next 401k - and roll them out to Roth IRA a few times a year. It's a good way to get money into Roth IRA that would otherwise go to taxable (or tIRA uck).

This is something that is available in many plans, but many folks don't seem to know it.

[BachemFan]

Joe S.

It can be done, I did it with the guidance of Bogleheads, especially Alan S. See link below.

viewtopic.php?f=1&t=79221

Good Luck

Bachem Fan

[Joe S.]

Joe S.

It can be done, I did it with the guidance of Bogleheads, especially Alan S. See link below.

viewtopic.php?f=1&t=79221

Good Luck

Bachem Fan

Thanks for the information.

I already rolled the pretax money over via a direct 401k to Vanguard transfer. Would that change anything?

[killjoy2012]

For what it's worth (not much)....

I'm classified as a HCE in my mega-company's 401k plan. As such they limit me to 10% pre-tax, 2% post-tax (not Roth, but just 2% non-deductible contributions to the 401k). The plan administrator is Fidelity, and they told me that I can roll that 2% directly into an external (e.g. Vanguard) Roth IRA at any time w/o any tax consequences.

[Alan S.]

Joe,
In your situation, you fall into the IRS created "ambiguous zone" with respect to isolating basis between a TIRA and a Roth IRA. This was created by Notice 2009-68. Since 2009, there have been several requests from major employee benefits firm to the IRS to clarify their intent. Nothing has been forthcoming and for 3 years now many employees have been doing twin rollovers (Pre tax to TIRA and post tax to Roth) and the plan administrators have not been directed by the IRS to change 1099R reporting, and therefore those twin rollovers are pretty secure.

The 1099R programming cycle for employer plans begins around November, so the IRS has another 10 months or so to potentially issue directives for change. For that reason, it is safer to do these rollovers after November when it's too late for the IRS to change instructions, than to do it now when the IRS has 10 months to determine what they will do for 2013. That said, there is not too much to risk even now in rolling the after tax check to your Roth IRA, with the intent to report it as a tax free Roth rollover on line 16b of your 1040. The 1099R for it will show no taxable amount in Box 2a. If the IRS rules against you in the meantime, you have until 10/2014 to recharacterize a 2013 rollover (conversion) back to a TIRA. That said, if this were to happen, then you have 8606 basis in your TIRA that can only come out pro rata, and some people would not want that compared to simply keeping the after tax amount as taxable savings.

GIven the ACA and everything else the IRS has on their table now, I would be inclined to do the rollover to the Roth IRA since the potential benefit exceeds the risks.