Permissable transfer money from 401k direct to Roth IRA

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Permissable transfer money from 401k direct to Roth IRA

Postby antiqueman » Fri May 10, 2013 7:24 am

Is it permissable within the IRS guidelines to transfer money on which taxes have not been paid direct from a 401 K to a Roth IRA.


I have converted all of my TIRA to Roth but would like to transfer some of my 401k to Roth over a number of years. Do I have to transfer from IRA to a TIRA and then to the Roth or can I just transfer it directly to Roth and avoid extra work and potential issues.


I assume I can transfer it direct from 401k to the Roth because it will be the same taxes owed. However, if anyone knows for sure and can direct me to the IRS rule on that I would appreciate it.


Have a good day.
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Re: Permissable transfer money from 401k direct to Roth IRA

Postby Default User BR » Fri May 10, 2013 3:26 pm

You can do a direct rollover to a Roth IRA. Pretty everything you need to know about this sort of thing is in IRS Pub 590. You can start here: http://www.irs.gov/publications/p590/ch02.html#en_US_2012_publink1000231029


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Re: Permissable transfer money from 401k direct to Roth IRA

Postby retiredjg » Fri May 10, 2013 8:10 pm

antiqueman wrote:Is it permissable within the IRS guidelines to transfer money on which taxes have not been paid direct from a 401 K to a Roth IRA.

Agreed. If you are eligible for distributions, the money can now be rolled directly to Roth IRA.
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Re: Permissable transfer money from 401k direct to Roth IRA

Postby Retread » Fri May 10, 2013 9:43 pm

Although it is taxable at that point, of course...
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Re: Permissable transfer money from 401k direct to Roth IRA

Postby 22twain » Fri May 10, 2013 10:30 pm

I think the usual word for non-Roth --> Roth is "conversion", not "rollover". A Google search on "roth conversion" will turn up lots of hits.
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Re: Permissable transfer money from 401k direct to Roth IRA

Postby tfb » Sat May 11, 2013 1:22 am

retiredjg wrote:If you are eligible for distributions, the money can now be rolled directly to Roth IRA.

That is the key. The OP didn't say whether he is still working for the employer that sponsors the 401k or whether he is over or under 59-1/2.
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Re: Permissable transfer money from 401k direct to Roth IRA

Postby tfb » Sat May 11, 2013 1:25 am

22twain wrote:I think the usual word for non-Roth --> Roth is "conversion", not "rollover". A Google search on "roth conversion" will turn up lots of hits.

From 401k to IRA is a rollover; it doesn't matter whether the IRA is a traditional or Roth. From traditional 401k to a Roth 401k within the same plan is also a rollover. From a traditional IRA to a Roth IRA is a conversion.
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Re: Permissable transfer money from 401k direct to Roth IRA

Postby Default User BR » Sat May 11, 2013 1:58 am

tfb wrote:
22twain wrote:I think the usual word for non-Roth --> Roth is "conversion", not "rollover". A Google search on "roth conversion" will turn up lots of hits.

From 401k to IRA is a rollover; it doesn't matter whether the IRA is a traditional or Roth. From traditional 401k to a Roth 401k within the same plan is also a rollover. From a traditional IRA to a Roth IRA is a conversion.

Although Pub 590 will tell you that the latter is also a rollover:

http://www.irs.gov/publications/p590/ch02.html#en_US_2012_publink1000231030


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Re: Permissable transfer money from 401k direct to Roth IRA

Postby retiredjg » Sat May 11, 2013 9:05 am

tfb wrote: From traditional 401k to a Roth 401k within the same plan is also a rollover.

I would have called this one a "conversion". Go figure.
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Re: Permissable transfer money from 401k direct to Roth IRA

Postby Default User BR » Sat May 11, 2013 1:16 pm

retiredjg wrote:
tfb wrote: From traditional 401k to a Roth 401k within the same plan is also a rollover.

I would have called this one a "conversion". Go figure.

The IRS calls it a rollover.

http://www.irs.gov/Retirement-Plans/Retirement-Plans-FAQs-on-Designated-Roth-Accounts#irr


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Re: Permissable transfer money from 401k direct to Roth IRA

Postby retiredjg » Sat May 11, 2013 8:58 pm

Default User BR wrote:The IRS calls it a rollover.

I agree. But to keep terminology consistent, I would have thought it would be a conversion. So there must be some difference between a rollover and a conversion that I haven't figured out yet.
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Re: Permissable transfer money from 401k direct to Roth IRA

Postby Default User BR » Sun May 12, 2013 2:32 pm

retiredjg wrote:
Default User BR wrote:The IRS calls it a rollover.

I agree. But to keep terminology consistent, I would have thought it would be a conversion. So there must be some difference between a rollover and a conversion that I haven't figured out yet.

I don't believe there is. A conversion is merely a type of rollover. Understand that I'm saying not to use the term "conversion". It's just that technically it is a rollover.

I would always recommend that people thinking of doing anything with an IRA review IRS Pub 590. It's a great resource that goes over most points, frequently with illuminating examples.


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Re: Permissable transfer money from 401k direct to Roth IRA

Postby bayview » Sun May 12, 2013 5:32 pm

Fidelity calls moving an IRA away from them to a different institution a rollover. (They're not exactly forthcoming on what is involved on their website. :D )

I always thought that a rollover was from one type of account to another (401k to IRA, etc.), but apparently not... :confused

The terminology on this seems mighty flexible, depending on who's presenting the info.
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Re: Permissable transfer money from 401k direct to Roth IRA

Postby retiredjg » Sun May 12, 2013 7:35 pm

bayview wrote:Fidelity calls moving an IRA away from them to a different institution a rollover.

I think it actually is a rollover if the money goes through the IRA owner's bank on the way to the next custodian. But if it goes custodian to custodian, I think that is called a trustee to trustee transfer.

But again, I'm not sure those are the right terms or just what people have called things. The terminology can be confusing and lots of times it seems people (including me) are using the wrong term. It's amazing we can even understand each other!
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Re: Permissable transfer money from 401k direct to Roth IRA

Postby bayview » Sun May 12, 2013 10:47 pm

Amazingly, I did gnaw my way through an appreciable portion of IRS Publication 590, and it pretty much agrees. http://www.irs.gov/publications/p590/ch01.html#en_US_2012_publink1000230559 If one institution sends the money directly to the next, it's a trustee-to-trustee transfer. If the money is sent to the owner, who then hustles it along to the next institution within 60 days, it's a rollover.

I suppose Fidelity is semi-accurate in that it appears that they simply don't do trustee-to-trustee transfers, but send the check to the account owner instead, so they pretty much force the process to be a rollover. Interestingly, it never came anywhere near our bank. It just came out of one envelope, went into another, and was dropped into the mailbox. The check was made out to Vanguard F/B/O Bayview's Husband, so although the piece of paper came to him, the money was sent from Fidelity to Vanguard. It was never actually his.

I moved two small 401k's into my Vanguard IRA. One charged an account closure fee and sent me the check, made out to Vanguard, not me, which I then stuck back in the mail and sent to Valley Forge. The other charged no fee (which was a huge surprise, as this was Lincoln Financial Group, a fee-happy outfit) and sent the money electronically. Go figure.

Vanguard seems to consider a rollover a change from one type of plan to another, and a transfer an IRA to an IRA, per these links on https://investor.vanguard.com/what-we-offer/iras/benefits-of-an-ira:

Roll over your 401(k) or other employer plan to a Vanguard IRA
Transfer an IRA from another company to Vanguard
Take ownership of an inherited IRA

--and this is what I always thought to be the distinction.

Anyway, not the end of the world, but I get pretty irate at those who sneer at and criticize everyday Americans who are baffled by the ins-and-outs of managing their retirement funds and who occasionally screw it up, or who even give up on the whole thing as a giant scam. When there isn't even a consistent definition of commonly-used terms, the understanding of which is pretty critical for tax purposes, it's no wonder that people are baffled.
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Re: Permissable transfer money from 401k direct to Roth IRA

Postby tfb » Sun May 12, 2013 11:55 pm

bayview wrote:Anyway, not the end of the world, but I get pretty irate at those who sneer at and criticize everyday Americans who are baffled by the ins-and-outs of managing their retirement funds and who occasionally screw it up, or who even give up on the whole thing as a giant scam. When there isn't even a consistent definition of commonly-used terms, the understanding of which is pretty critical for tax purposes, it's no wonder that people are baffled.

To be fair I don't think whatever you read in the media about people's retirement woes is rooted in their not understanding the difference between a rollover and a transfer. Making improvement is very easy: just jack up the 401k contribution rate or contribute to begin with. Vanguard publishes How America Saves every year using aggregate data it sees from the 401k/403b plans it administers. You see huge areas for improvement there.
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Re: Permissable transfer money from 401k direct to Roth IRA

Postby bayview » Mon May 13, 2013 12:22 am

tfb wrote:
bayview wrote:Anyway, not the end of the world, but I get pretty irate at those who sneer at and criticize everyday Americans who are baffled by the ins-and-outs of managing their retirement funds and who occasionally screw it up, or who even give up on the whole thing as a giant scam. When there isn't even a consistent definition of commonly-used terms, the understanding of which is pretty critical for tax purposes, it's no wonder that people are baffled.

To be fair I don't think whatever you read in the media about people's retirement woes is rooted in their not understanding the difference between a rollover and a transfer. Making improvement is very easy: just jack up the 401k contribution rate or contribute to begin with. Vanguard publishes How America Saves every year using aggregate data it sees from the 401k/403b plans it administers. You see huge areas for improvement there.

Actually, I was quoting my husband there. :wink: Fortunately, he is a savings fiend, although starting a bit late, as did I.

I do have co-workers, well-educated, highly skilled, good brains, who have contributed decent amounts to their TSP funds but have kept everything in the G fund because they have no idea where to start, and they don't think that they can figure it out. The knowledge gap appears overwhelming, especially as there is so much contradictory information out there. I realize this is not what I was talking about above, but it speaks to the same level of general bafflement about how all this works. They're an awfully long ways away from figuring out whether or how to move old 401k's into a new plan, or what goes in taxable and what in tax-advantaged.

Since the majority of American workers have been forced into 401k-type retirement plans, IMO these should be far simpler and more transparent in how they work, and the best ways to use them. In the meantime, resources like the Bogleheads forum are a great start in picking up the slack.
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Re: Permissable transfer money from 401k direct to Roth IRA

Postby Alan S. » Mon May 13, 2013 12:27 am

Movement of funds from a 401k to a Roth IRA can be completed in one of two ways:
1) A direct rollover, ie. the check is made out to the custodian of your Roth IRA for your benefit (FBO)
2) Funds are distributed to you less mandatory 20% withholding and you roll over the funds (withholding dollars can be replaced) yourself within 60 days.

A "direct rollover" is a hybrid term, meaning that it is similar to a transfer, but always must be reported like a rollover. This is the most logical way to proceed due to elimination of withholding. Even though the rollover will be taxable, withholding is not required.

Fidelity should have referred to this as a "direct rollover" unless the funds are paid directly to the employee.
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Re: Permissable transfer money from 401k direct to Roth IRA

Postby tfb » Mon May 13, 2013 1:33 am

bayview wrote:I do have co-workers, well-educated, highly skilled, good brains, who have contributed decent amounts to their TSP funds but have kept everything in the G fund because they have no idea where to start, and they don't think that they can figure it out. The knowledge gap appears overwhelming, especially as there is so much contradictory information out there. I realize this is not what I was talking about above, but it speaks to the same level of general bafflement about how all this works. They're an awfully long ways away from figuring out whether or how to move old 401k's into a new plan, or what goes in taxable and what in tax-advantaged.

Since the majority of American workers have been forced into 401k-type retirement plans, IMO these should be far simpler and more transparent in how they work, and the best ways to use them. In the meantime, resources like the Bogleheads forum are a great start in picking up the slack.

TSP added the L funds specifically for this purpose right? If participants don't know any better, pick the L fund closest to the planned retirement date. Somehow that message didn't get through? Not moving old 401k's into a new plan isn't the end of the world either if the money is just left in a similar target date fund. If people want to know, it's not that hard to figure out. It's much simpler than some sports stuff I have no clues of. You don't have to know much to get the basics right. It's just a matter of where people decide to spend time and energy.
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Re: Permissable transfer money from 401k direct to Roth IRA

Postby Electron » Thu Jul 04, 2013 4:40 pm

Publication 590 includes a table showing eligible rollovers between different types of plans. See Table 1-4 on page 23 of the publication for 2012 returns.

http://www.irs.gov/pub/irs-pdf/p590.pdf

The line for Qualified Plans such as a 401K apparently only applies to pre-tax money with that term shown in parentheses.

What are the options for any non-taxable amounts distributed at the same time with a second check? Are those also eligible to be rolled over to the same Roth IRA account?

My 401K plan also sends checks directly to the plan owner who must then forward to the IRA custodian. The pre-tax check is typically made out to the IRA Custodian FBO Account Owner. I don't know about the non-taxable check but have a feeling they make it out to the individual. Actually, a single check for both might simplify things but I don't know if the distribution can be handled that way.

Lastly, are two separate 1099R forms generated if both pre-tax and non-taxable checks are sent out? I assume the coding is different on each.
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Re: Permissable transfer money from 401k direct to Roth IRA

Postby Alan S. » Thu Jul 04, 2013 11:25 pm

The "pre tax" indicator in the chart is misleading. The intent is to distinguish between what is known as a "traditional" qualified plan from a designated Roth qualified plan account. After tax contributions can be made to the "pre tax" account and they receive the same rollover options as the pre tax money in those accounts. The descriptive terminology is definitely lacking here, potentially causing problems.

You can definitely roll over the after tax money you received to a Roth IRA and you should unless you are desperate need for funds. If the amount is significant, many people attempt to "isolate their basis", sending the pre tax balance to a TIRA and the after tax balance to a Roth IRA. If you roll the entire plan balance to your Roth IRA, you will of course be taxed only on the pre tax amount of the rollover. If you want to "isolate your basis" to the Roth IRA, please advise and we can go over the options. It can be complicated because the IRS has released Notices, but with no follow up on reporting procedures.

If you do a direct rollover of the pre tax funds to a Roth IRA and receive a check for the post tax amount, there will be separate 1099R forms issued. This is also true if you have the pre tax funds rolled to a TIRA and the after tax amount made out to you.

If you have not yet ordered the direct rollover, your main decision is whether you want to pay the taxes to convert the pre tax money, or only have the after tax balance rolled to the Roth.
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Re: Permissable transfer money from 401k direct to Roth IRA

Postby Electron » Fri Jul 05, 2013 12:37 am

Alan - Thanks for the help. Glad to hear that non-taxable contributions can be rolled over as well, and I agree that the term "pre-tax" in the table is quite misleading.

Part of my concern is that the 401K custodian does not do direct rollovers that are truly direct. Checks go to the individual first and are then forwarded, although the checks are made out to the IRA Custodian FBO Individual's account. As a result it may not look any different to the IRA Custodian.

One other thing I'm trying to understand is whether the 1099R form would be different between a 401K to Traditional IRA rollover and 401K to Roth IRA rollover. At issue is whether the custodian bypasses withholding for the Roth case and assumes the individual will pay the required taxes and hopefully estimated taxes as well. I'm wondering if Box 2a would be the same or different on the 1099R forms for the two cases.

Later on I assume the IRS compares the 1099R with Form 5498 from the custodian and hopefully does not flag any problems. Also at issue is how the custodian fills out Form 5498.

I have reviewed the isolation of basis articles both recently and in the past including Fairmark. In the case of the 401K to Roth IRA maybe it is not a concern since taxes are being paid.
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Re: Permissable transfer money from 401k direct to Roth IRA

Postby Default User BR » Fri Jul 05, 2013 1:29 am

Electron wrote:Part of my concern is that the 401K custodian does not do direct rollovers that are truly direct. Checks go to the individual first and are then forwarded, although the checks are made out to the IRA Custodian FBO Individual's account. As a result it may not look any different to the IRA Custodian.

That is a direct rollover, and relatively common. MyMegaCorp does the same thing. Direct doesn't mean it's a custodian-to-custodian transfer, just that the money isn't given to you. As you note, the check is made out to the receiving institution. This should cause no concern. All parties are used to this.


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Re: Permissable transfer money from 401k direct to Roth IRA

Postby Electron » Sun Jul 07, 2013 1:09 pm

Default User BR wrote:That is a direct rollover, and relatively common. MyMegaCorp does the same thing. Direct doesn't mean it's a custodian-to-custodian transfer, just that the money isn't given to you. As you note, the check is made out to the receiving institution. This should cause no concern. All parties are used to this.

Thanks Brian. That clears up that issue.

Does anyone know if 401K plans are required to withhold Federal tax for direct rollovers to Roth IRAs? I have information from another individual in my 401K plan suggesting that they do not withhold.

If that is the case, it would be interesting that withholding is mandatory for regular 401K withdrawals but not 401K to Roth IRA rollovers.

I assume that a 401K rollover to Traditional IRA results in no withholding and the 1099R Box 2a is either blank or shows $0.00. A 401K rollover to Roth IRA is taxable and I assume the 1099R Box 2a shows the taxable amount. If this is not correct please let me know.
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Re: Permissable transfer money from 401k direct to Roth IRA

Postby Default User BR » Sun Jul 07, 2013 1:51 pm

Electron wrote:Does anyone know if 401K plans are required to withhold Federal tax for direct rollovers to Roth IRAs? I have information from another individual in my 401K plan suggesting that they do not withhold.

They are not. They do have to withhold for indirect rollovers (as with any distribution to the account holder). In reality, the 401(k) administration doesn't know what sort of IRA you're rolling into, just that you've requested a direct rollover and waived withholding.

Here's what the IRS says:
Any taxable amount that is not rolled over must be included in income in the year you receive it. If the distribution is paid to you, you have 60 days from the date you receive it to roll it over. Any taxable distribution paid to you is subject to mandatory withholding of 20%, even if you intend to roll the distribution over later. If the distribution is rolled over, and you want to defer tax on the entire taxable portion, you will have to add funds from other sources equal to the amount withheld. You can choose to have your 401(k) plan transfer a distribution directly to another eligible plan or to an IRA. Under this option, no taxes are withheld.

Note that no distinction is made as to which type of IRA.


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Re: Permissable transfer money from 401k direct to Roth IRA

Postby Electron » Sun Jul 07, 2013 2:52 pm

Default User BR wrote:In reality, the 401(k) administration doesn't know what sort of IRA you're rolling into, just that you've requested a direct rollover and waived withholding.

Note that no distinction is made as to which type of IRA.

Thanks Brian. That is surprising because I thought the IRS would later match information on the 1099R with Form 5498 issued by the IRA custodian.

If the 401K custodian does not know the type of IRA Rollover, then 1099R Box 2a cannot indicate the taxable amount. Maybe Form 5498 provides the key information the IRS needs to determine if taxes are paid on the conversion.
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Re: Permissable transfer money from 401k direct to Roth IRA

Postby Epsilon Delta » Sun Jul 07, 2013 3:25 pm

Electron wrote:If the 401K custodian does not know the type of IRA Rollover, then 1099R Box 2a cannot indicate the taxable amount. Maybe Form 5498 provides the key information the IRS needs to determine if taxes are paid on the conversion.


Your tax return provides the key information the IRS needs to determine if taxes need to be paid. If they don't believe you they may ask for proof.
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Re: Permissable transfer money from 401k direct to Roth IRA

Postby Electron » Sun Jul 07, 2013 4:16 pm

Epsilon Delta wrote:Your tax return provides the key information the IRS needs to determine if taxes need to be paid. If they don't believe you they may ask for proof.

I had the impression that IRS computers check a great deal of information submitted to them. Tax returns can be incorrect. In addition, I seem to recall forum posts where incorrect 1099R or 5498 Forms can result in a letter from the IRS.
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Re: Permissable transfer money from 401k direct to Roth IRA

Postby Epsilon Delta » Mon Jul 08, 2013 2:04 pm

Electron wrote:
Epsilon Delta wrote:Your tax return provides the key information the IRS needs to determine if taxes need to be paid. If they don't believe you they may ask for proof.

I had the impression that IRS computers check a great deal of information submitted to them. Tax returns can be incorrect. In addition, I seem to recall forum posts where incorrect 1099R or 5498 Forms can result in a letter from the IRS.

The IRS does indeed gather a vast amount of information on information returns such as 1099s, 5498s and W2s. Some of this is compared with filed returns*, if it differs that is a reason for the IRS to believe a tax return is incorrect**, but if you can prove that your return is correct (i.e. that the information return was wrong) then the IRS will go and bother the people who filed the incorrect information return. And there are still plenty of elements on tax returns that the IRS cannot, even in theory, verify from information returns.

When you sign a tax return you are affirming that the return is correct, you are not affirming that it agrees with all the information returns. As a practical matter if you know an information return is incorrect it is easier to take it up with the third party and get it corrected.

*although some of the information that could in theory be compared apparently isn't.
** There are other reasons, including the gut feeling of an auditor.
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