Rollover of after tax 401K contributions

[runnergirl]

I read here with interest how one can contribute to an after-tax 401K and then roll-over that after-tax amount to one's own IRA (back-door Roth in my case). I contacted my HR person and below is what she said. I want to make sure I understand correctly. I can contribute $50,000-$17,000-$match? Then I ask for an in-service withdrawal and deposit that into my traditional IRA and then rollover into my Roth IRA? Is this a good idea? My IRAs are with Fido.

1) Are post-tax contributions to the 401K plan (for a non-bargaining employee, under age 59 1/2) able to be roll-over into an IRA at another institution Yes, the plan permits an in-service withdrawal ($500 minimum threshold) from the after-tax sources in the Plan and those amounts are eligible for rollover to an IRA. The IRA has to be able to accept the post-tax contributions and track the basis. The Participant should talk to the IRA provider in order to ensure the account is set up and maintained properly.

2) Does making post-tax contributions to the 401K plan cause me to lose pre-tax contribution tax benefits? Participant’s can make post-tax and pre-tax contributions at the same time. If Participant’s choose to just contribute post-tax then, the Participant will only receive the post-tax benefits. The character (pre-tax or after-tax) of each contribution made to the Plan is established at the time the amount is deposited into the Plan and can’t be changed at a later date. Any contributions made on a pre-tax basis will continue to grow on a tax deferred (contributions and earnings) basis even if the participant decides to start contributing on an after-tax basis. Only the earnings will grow on a tax deferred basis on amounts contributed after-tax. Of course the after-tax contributions are not taxed upon distribution. Keep in mind that when taking an in-service withdrawal of after-tax amounts the distribution will consist of both contributions and earnings, unless the after-tax contributions were made prior to 1987.

[coinflip]

What you describe is pretty much how my plan works, except I was able to roll the funds over directly to my Roth account.

These threads have some more information:

viewtopic.php?f=1&t=71207

viewtopic.php?f=2&t=66208

[Alan S.]

If your plan allows you do make these after tax contributions and then allows you to distribute them at least once per year and preferably more often, you should make the conversion directly to a Roth IRA. That will avoid the pro rating calculation of Form 8606 that would apply if the rollover was made to a TIRA first. The more frequently you can do these rollovers to the Roth, the less time for taxable earnings to be generated when you convert.

For those that have a significant amount of earnings in their account for various reasons, it may be worth the extra effort to "isolate the basis" so that only the contributions go to the Roth IRA and the earnings go to your TIRA. Some plans will offer tandem direct rollovers, but doing this comes with the risk that the IRS will require pro rating of the basis to each IRA type per Notice 2009-68. To remove that risk, you could ask for a distribution of the full after tax account made to you, then do your rollovers in the following order. First, roll the pre tax amount to your TIRA, and after this is done roll the after tax amount to your Roth IRA, making up for the 20% withholding on the pre tax amount of the distribution.

This approach can be used for any eligible rollover distribution from a plan before or after retirement, but is ideally suited for these after tax account if significant earnings were generated that you do not wish to pay taxes on. In most cases though, if you are allowed to do the rollovers frequently enough, the earnings should be modest should not result in much taxable income from the Roth rollover. While these Roth rollovers are subject to the 5 year holding period in the Roth to avoid penalty, that penalty ONLY applies to the small pre tax portion of each year's rollovers should you need access to the funds before 5 years and you are also under 59.5.

Some plans may limit the total contributions to also include room for forfeitures of company matching from other employees, since amounts credited to your plan from this source are also subject to the overall Sec 415(c) annual additions limit of 50,000 (plus age 50+ catchup of 5,500).

[runnergirl]

Thanks for all your help. Can I roll over straight to a Roth IRA if I am over the income phase-out for direct contributions to Roths and already contributed $5000 to my traditional IRA this year and then back-doored it into the Roth? How does it work if one is a "highly-compensated employee?" I don't know what that means or how it affects the situation.

[Alan S.]

Your income does not affect your ability to do a "qualified rollover contribution" to a Roth IRA. These rollovers have the basically the same rules as Roth conversions except that the source is an employer plan. The last year for income limits on qualified rollover contributions was 2009. You can complete these either by direct rollover or indirect 60 day rollover.

Your non deductible TIRA contribution and subsequent conversion is not affected by the qualified rollover contribution above. Also, being an HCE does not affect your qualification to do this, it just affects the amount of your elective deferrals to your 401k plan.

The main considerations:
1) Your plan must allow these distributions if you are still employed.
2) You must be willing to pay the taxes for the Roth rollover based on the amount of the distribution that was from pre tax contributions. You should determine how much of the rollover will be taxed before you order it. You can still recharacterize the rollover if you wish, but it would have to go to a TIRA account, not back to the plan. If the Roth rollover was mostly non taxable, you would be unlikely to consider recharacterizing it.

[xerty24]

Your non deductible TIRA contribution and subsequent conversion is not affected by the qualified rollover contribution above. Also, being an HCE does not affect your qualification to do this, it just affects the amount of your elective deferrals to your 401k plan.

Being an HCE can preclude you from making some or all of your after-tax contributions in the first place, however, under the ACP test (in the same way the ADP test might preclude or reduce an HCE from making full elective deferrals). The danger here is that your plan's ADP/ACP testing is unlikely to be finalized until after the year end, so if you make after-tax contributions and then convert them out to your Roth IRA, you might have to unwind part or all of this process if it turns out some of your contributions weren't allowed in the first place. This will be a real mess in terms of paperwork and obscure rules most administrators will have never dealt with.

If you've every had HCE reductions in your elective deferrals, I'd suggest waiting until near the year end to make your after-tax contributions and then waiting until you get the go-ahead from your HR department / 401k administrator that the prior year's contributions will stand before making your withdrawal/conversion.

[m2go]

I have a question about isolating the basis, and about how distributions are attributed, esp. with respect to the risks associated with IRS will require pro rating of the basis to each IRA type per Notice 2009-68.

I understand that the notice made reference to the fact each dollar distributed from the 401(k) would/may have to be pro-rated between after-tax and before-tax amount. Is the understanding that this pro-rating is only between the "before-tax amounts" that correspond to the earnings of the after-tax contribution, or, rather, to before-tax amounts that also correspond to before-tax contributions to the 401(k), employer matches, and the respective earnings?

If the latter interpretation (pro-rating across _ALL_ before-tax amounts, incl. regular 401k contributions), it would appear that the only time you can roll over after-tax amounts is when you re separating from the company, can roll over all your 401k and run basis isolation as described above? On the other hand, if distributions are just after-tax contribs and earnings, with in-service distributions it would appear like an almost bottom-less opportunity to roll funds into a Roth IRAs?

So, can somebody clarify what pro-rating the IRS may force us to do between after tax and before-tax, i.e., of before-tax earnings of after-tax contribs only, or on all before-tax amounts incl. regulars 401k contribs?

[Default User BR]

If the latter interpretation (pro-rating across _ALL_ before-tax amounts, incl. regular 401k contributions), it would appear that the only time you can roll over after-tax amounts is when you re separating from the company, can roll over all your 401k and run basis isolation as described above? On the other hand, if distributions are just after-tax contribs and earnings, with in-service distributions it would appear like an almost bottom-less opportunity to roll funds into a Roth IRAs?

In that case, there are a number of large companies doing it incorrectly. Additionally, many people have be taking these distributions, doing rollovers/conversions, and filing tax returns based on the movements without the IRS objecting.


Brian

[Alan S.]

The IRS has issued very little guidance regarding pro rating guidelines for employer plans. They seem to be under the impression that plan balances all go to a single type of IRA account. However, if you think about it, if pro rating was to include balances that were not eligible for distribution, the accounting for the balance remaining in the plan would become a quagmire. For example, if your after tax contributions eligible for distribution became mostly taxable, then some of the pre tax deferrals left in the plan would have to be categorized as taking on the basis that was not distributed. And any after tax contributions that were eligible for in service distribution.

At the individual taxpayer compliance level, the IRS is guided by the 1099R issued by the employer. The problem with Notice 2009-68 is that the IRS never followed up with 1099R guidance to the plan administrators requiring them to show the breakdowns required to enforce the Notice. The American Benefits Council sent the IRS two letters shortly after the ruling pleading for the IRS to clarify the Notice, but they IRS never did (see Note and second letter below). Therefore, for 3 years now many employees have been able to do these direct rollovers without pro rating, meaning no tax currently due.

In summary, the plan should be pro rating only the funds eligible for rollover. In the typical situation where the bulk of the pre tax balance is not even eligible for in service distribution, that balance should be ignored. Pro rating should include ONLY the funds that are eligible for distribution.

Also, note that Notice 2009-68 presents a risk for those doing direct rollovers because the IRS could issue this guidance anytime. If issued by around October it could affect 2012 1099R forms. However, doing an indirect rollover is not subject to pro rating because it is protected by the current tax code sec 402(c)2 which clearly states that if distributions are made to an employee, the first dollars rolled over are deemed to be the taxable amount. Therefore, if you can replace the 20% withholding on the pre tax amount, doing your own indirect 60 day rollovers are safer. Roll the pre tax amount over first to a TIRA and then the after tax amount to a Roth IRA. This is Kaye Thomas' strategy 3 for those familiar with Fairmark.

NOTE: The following is the American Benefits second letter to the IRS, asking for clarification, and stating their case that there should not be differing rules for direct and indirect rollovers:
http://www.americanbenefitscouncil.org/ ... _402c2.pdf

[Default User BR]

One thing to remember is that the IRS can't just do whatever it feels like. They have to justify what they do in court. It's one thing to take on a few individuals who might not feel like fighting it, it's another to deal with Megacorps with teams of lawyers on staff. The IRS would have to be pretty sure that they had an unassailable position before doing that.


Brian

[runnergirl]

Very informative Alan S. If the plan only allows inservice withdrawals once a year, what kind of fund do you suggest I put it in while it waits to be rollovered so that I don't incur too much taxable gain?

[m2go]

Very informative Alan S. If the plan only allows inservice withdrawals once a year, what kind of fund do you suggest I put it in while it waits to be rollovered so that I don't incur too much taxable gain?

I don't think that should be the objective. I think there are two routes to deal with mixed 401(k) in-service distributions:
(1) Isolate the basis
(2) Roll over your after tax and pre-tax amounts, and pay tax on return (i.e., the pretax amount).

The benefit on (1) is that you have the opportunity to keep pre-tax money as pre-tax, BUT: if you isolate the basis and end up with it in an IRA, you lose the back-door Roth IRA ability (or be forced to pay tax on pre-tax earnings, and you end up in scenario (2)). You might try to "hide" the t-IRA, either by rolling back into the 401k , or starting a solo 401(k). The former may not be available (e.g., not sure my employer lets me roll money into my 401k), not sure if you can start a solo 401k in parallel to your company 401k? You will need extra cash to the tune of 20% of your dsitribution to cover the tax that will be withheld, but will get that back when you file your tax return for the year.

If you (2) pay tax on the return, this is like a ROth conversion for your pretax amount. I would argue that you're better off having a large gain, and paying half of that to Uncle Sam, leaving you with half your gain (actually, leaving you with the FULL GAIN in an after-tax account, and paying tax from your income - which may be advantageous, but means you need extra $$$). In extremis, the alternative (which you seem to be asking about) is to get $0 return, giving Uncle Sam $0, and keeping $0 gain.

[retiredjg]

Very informative Alan S. If the plan only allows inservice withdrawals once a year, what kind of fund do you suggest I put it in while it waits to be rollovered so that I don't incur too much taxable gain?

I don't think I'd worry about having the gain.

We do talk about investing in money market to avoid gains or losses for a back door Roth IRA contribution. It's convenient because it just keeps the paperwork nice and easy and clean. Contribute $5k, convert $5k - end of story because there is no possibility of a loss in the meantime (leftover basis on your 8606 form) or a gain (that requires taxes).

The pre-tax 401k is a little different. From what I've read here, you might not even have a choice of what to invest in. It might have to be the same thing the regular part of your 401k (elective deferrals) is invested in. And if you have to pay a little tax on gains to get extra money into Roth status, it is a small price to pay. But that is why there is a suggestion to do the rollover a few times a year (if the market is generally rising) - that limits the time available for gains to occur. If the market is falling, you might even delay the rollover so that you are not rolling over less money than you put in.

[jebmke]

Also, note that Notice 2009-68 presents a risk for those doing direct rollovers because the IRS could issue this guidance anytime. If issued by around October it could affect 2012 1099R forms. However, doing an indirect rollover is not subject to pro rating because it is protected by the current tax code sec 402(c)2 which clearly states that if distributions are made to an employee, the first dollars rolled over are deemed to be the taxable amount. Therefore, if you can replace the 20% withholding on the pre tax amount, doing your own indirect 60 day rollovers are safer. Roll the pre tax amount over first to a TIRA and then the after tax amount to a Roth IRA. This is Kaye Thomas' strategy 3 for those familiar with Fairmark.

I plan to do this later this year. I have been waiting to get a clearance on my 2009 return. Other than the sequencing of the roll (TIRA then ROTH), are there any other suggestions on adding substance to this method? For example, would there be any value in having the ROTH at a different institution? Or say, do the TIRA part in December 2012 and the ROTH part in January 2013 (all within the 60 days)?

What would the 1099R look like on the distribution to me -- would that only show the pre-tax amount or total amount + pre-tax in the box labeled "taxable"? Box 7 code?

[Euclidian]

I'm also considering a similar move and welcome comments on anything I'm missing. I've read through all the threads but don't see my exact situation.

I've a 401k at Fidelity -- about half of which of which is eligible for in-service withdrawal/rollover. The eligible portion has both after-tax (pre-1986?) and much larger pre-tax (employer contributions, etc.) elements. The plan allows me to roll the after-tax to a Roth IRA and the pre-tax to a traditional IRA directly at Fidelity. This does not affect my ability to contribute to the 401k.

I'm considering doing this to get access to better funds (in IRA) and to set me up for potential additional after-tax contributions that I can then move to the Roth IRA. I already have existing traditional and Roth IRA's that I would add these funds to.

It appears there are no taxes due for what I'm planning; Fidelity and tax firm say they think there are no taxes due but can't give a firm opinion. Am I missing anything regarding the tax implications?

[m2go]

Euclidian,

you cannot do direct rollovers into 2 different accounts. That's the gist of the IRA notice, that when you do 2 separate distributions, they are NOT isolated along the lines that you would like, i.e., the pretax money in one transfer (tIRA) and the after-tax money in another transfer (RIRA).

Rather, they are commingled in a ratio corresponding to the relationship of pre- and after-tax monies. You have to get all the money in your own hands, and based on the sequencing if two contributions in reference with IRA laws, you would first deposit the pre-tax monies (i.e., the t-IRA), and then, after you have confirmation and proof, deposit the R-IRA (a bank taking longer can invert the sequencing and wreak havoc). Also, when you get monies distributed to yourself, you will find a 209% withholding, that you will need to replenishwith you own funds, until you get the tax refund at which point it will be refunded you.

Now, the remaining question is whether the ratio of pretax and after tax amounts only considers funds emanating from after tax contributions (Alan's point), or of all contributions (my worry). Alan has a very good point about the rationality of the code. I agree with his observations, but caution that the IRS may still take a stance that conflicts with this (and they have been unwilling to clarify). I believe this is an example of Fear, Uncertainty and Doubt, because it's the closest thing to a legal tax shelter.

Final observation: once yo've separated the basis into the t-IRA and R-IRA, you have closed the backdoor to the R-IRA contributions, because the civersion laws require you to convert pro-rate between pretax t-IRA and after-tax t-IRA contributions.

[Alan S.]

Remember, that pre 1986 after tax contributions have a special exception from pro rating, as long as your plan separately accounts for that balance. Here is Sec 72(e)(6)(D):

(D) Investment in the contract before 1987
In the case of a plan which on May 5, 1986, permitted withdrawal of any employee contributions before separation from service, subparagraph (A) shall apply only to the extent that amounts received before the annuity starting date (when increased by amounts previously received under the contract after December 31, 1986) exceed the investment in the contract as of December 31, 1986.

This means that you could specify this balance for a direct rollover to a Roth IRA, and such rollover would be tax free if the plan allows the in service distribution.

[Default User BR]

Assuming they allow taking the distributions separately, do them in different years.


Brian

[runnergirl]

So is the best procedure to:

1) ask for inservice withdrawal of post-tax 401K amount (which may include some pre-tax gains)

2) have check sent to me minus 20% federal tax withholding (can I opt out of the 20% w/holding?)

3) deposit the amount (with 20% added back in) into a traditional IRA within 60 days

4) rollover from traditional IRA to Roth IRA

5) pay taxes on any pre-tax gains or if significant gains roll the gains into TSP (where I have previously rolled all pre-tax amounts)

I found out that our plan allows unlimited number of inservice withdrawals but I probably don't want to do it too often.

[doug91]

RG,
I apologize if I missed a detail that makes this impossible for you, but here's what I do with my Fidelity 401k:

0) Opened a Roth IRA at Fidelity

1) call Fidelity after each paycheck & ask for "inservice withdrawal without suspension" of post-tax 401K amount (which may include some pre-tax gains) to go directly to my Fidelity Roth IRA

2) pay taxes on any pre-tax gains at the end of the year (minimal, since once I hit by pre-ta 401k totals, I redirect contributions to Money Market)

I did this last year, barely had any taxes and TurboTax handled it beautifully with no complications. There's a small ($20?) fee to do each inservice withdrawal, I believe, but it's worth it to me just to get the money into the Roth vehicle ASAP.

Edit: Sorry, skipped to the end of the thread too soon. To Alan's point, if there's a possibility that the rules might change, the 401k->tIRA->Roth does sound safer, I haven't done my homework on that.

Alan, I know it would be speculation at this point, but what remediation do you think would be available if the rules governing the direct 401k after-tax to Roth rollover were changed/clarified? I've just maxed out my pre-tax limits as of this month, and was about to start repeating my 2011 process. If the rules change, I assume I can't "put the money back," so do you think that it would have to be something like a recharacterization? Or would it just result in a big tax penalty?

[retiredjg]

So is the best procedure to:

1) ask for inservice withdrawal of post-tax 401K amount (which may include some pre-tax gains)

2) have check sent to me minus 20% federal tax withholding (can I opt out of the 20% w/holding?)

3) deposit the amount (with 20% added back in) into a traditional IRA within 60 days

4) rollover from traditional IRA to Roth IRA

5) pay taxes on any pre-tax gains or if significant gains roll the gains into TSP (where I have previously rolled all pre-tax amounts)

I found out that our plan allows unlimited number of inservice withdrawals but I probably don't want to do it too often.

runnergirl, I don't think this is the best procedure, but it should work if it is the only procedure available for you.

It would be best to do a direct rollover or transfer (not sure which is the most accurate term) from your 401k custodian to your IRA custodian. This can be done in a couple of ways. The money can go directly from custodian to custodian; or they can send a check to you but made out to the new custodian which you then forward to the new custodian. This eliminates the 20% federal withholding requirement.

If the money actually comes to you (check made out to you) there is a requirement to withhold the 20% because it might end up being a withdrawal (which is taxable) rather than a rollover (which is not taxable unless it is converted to Roth status).

It seems to me you have two good choices and which is best depends on what is in your traditional IRA. The other factor is whether you want to just pay the tax and get it all into Roth or put on the post-tax portion into Roth. If you want to get it all into Roth, just have them transfer the money directly into Roth IRA in which case you'll pay tax on the earnings part in your next tax return. That way, it will not matter what is in your traditional IRA because nothing will be pro-rated.

This is what Alan S meant way back near the top of the thread when he said:

"If your plan allows you do make these after tax contributions and then allows you to distribute them at least once per year and preferably more often, you should make the conversion directly to a Roth IRA. That will avoid the pro rating calculation of Form 8606 that would apply if the rollover was made to a TIRA first. The more frequently you can do these rollovers to the Roth, the less time for taxable earnings to be generated when you convert."

Similarly, if you want to roll any pre-tax money into your TSP, have your custodian directly transfer the money to your tIRA and then you split things out how you want, recording it all on form 8606. By "directly transfer", I mean you never get the money although you might get a check made out to the next custodian which you then forward.

Hope that made sense. What you want to avoid is actually getting the money (which requires the 20% withholding and you making up the 20% out of your savings).

[Default User BR]

The 20% withholding should only to be on the taxable portion, not the entire distribution. That being said, a direct rollover would be easier.


Brian

[retiredjg]

Good point!

[Nathan Drake]

Has anyone tried doing this with Fidelity? I see the option for both "rollovers" and "in-service withdrawals".

The "rollover" option only says "IRA" (doesn't mention a Roth).

[HopeToGolf]

I

Has anyone tried doing this with Fidelity? I see the option for both "rollovers" and "in-service withdrawals".

The "rollover" option only says "IRA" (doesn't mention a Roth).

Yes. Fidelity holds my 401K and Roth. My employer allows 4 in-service withdrawals a year so I contribute after-tax funds and 4x a year I call Fidelity and ask to do an in-service withdrawal and rollover to my Roth. I have not had a problem the last few years. I ran into reps who had a little bit of a hard time figuring things out probably 2x in 2 years.

Note that I said I call them. I am not sure whether or not this can be done via their site. It is a good site but I prefer the security of speaking to a person for this type of transaction.

[Nathan Drake]

I'll give them a call then. So you keep your Roth IRA with Fidelity instead of rolling it over to a different firm?

It may be simpler that way, but I have all my Roth IRA with Vanguard which offers a better international fund than the Spartan global ex-us fund (doesn't include small cap intl)

[Default User BR]

The "rollover" option only says "IRA" (doesn't mention a Roth).

A Roth is an IRA.


Brian

[m2go]

I

Has anyone tried doing this with Fidelity? I see the option for both "rollovers" and "in-service withdrawals".

The "rollover" option only says "IRA" (doesn't mention a Roth).

Yes. Fidelity holds my 401K and Roth. My employer allows 4 in-service withdrawals a year so I contribute after-tax funds and 4x a year I call Fidelity and ask to do an in-service withdrawal and rollover to my Roth. I have not had a problem the last few years. I ran into reps who had a little bit of a hard time figuring things out probably 2x in 2 years.

Note that I said I call them. I am not sure whether or not this can be done via their site. It is a good site but I prefer the security of speaking to a person for this type of transaction.

I came across conflicting information indicating that a rollover can be performed only once every 12 months being claimed by some documents on the web, while others claim this only applies to IRA to IRA rollovers.
Does anybody have more detailed information on how many 401k to IRA rollovers of after tax contributions we can make? Clearly, some members here seem to be doing more than 1 per 12 mo period.

Thanks!

[retiredjg]

There is a one year rule about IRA to IRA rollovers and it is discussed in IRS Publication 590.

http://www.irs.gov/publications/p590/ch ... 1000230568

I don't think I've ever heard about a 1 year rule associated with a 401k plan.

[Default User BR]

I came across conflicting information indicating that a rollover can be performed only once every 12 months being claimed by some documents on the web, while others claim this only applies to IRA to IRA rollovers.

Could you provide some links to these sources?


Brian

[bUU]

The publication says:

Waiting period between rollovers. Generally, if you make a tax-free rollover of any part of a distribution from a traditional IRA, you cannot, within a 1-year period, make a tax-free rollover of any later distribution from that same IRA. You also cannot make a tax-free rollover of any amount distributed, within the same 1-year period, from the IRA into which you made the tax-free rollover.

That's after a section that outlines lots of different kinds of rollovers (permitted and not permitted). It wouldn't be a stretch to say that the rule applies to all the (permitted) rollovers in that chart.

I really need a definitive answer to that, myself. We (foolishly, perhaps) transferred a tIRA from BoA to Fido, and also put a qualified lump-sum distribution from a pension plan into a tIRA at Fido, and so now I am wondering if that means I cannot roll those tIRAs into employee 401(k) plans for a year.

[retiredjg]

The publication says:

Waiting period between rollovers. Generally, if you make a tax-free rollover of any part of a distribution from a traditional IRA, you cannot, within a 1-year period, make a tax-free rollover of any later distribution from that same IRA. You also cannot make a tax-free rollover of any amount distributed, within the same 1-year period, from the IRA into which you made the tax-free rollover.

That's after a section that outlines lots of different kinds of rollovers (permitted and not permitted). It wouldn't be a stretch to say that the rule applies to all the (permitted) rollovers in that chart.

I think it is a stretch. The chart includes other types of plans (401k. 403b, 457), but the words in the 1 year rule discussion say "distribution from a traditional IRA...."

The whole discussion is about IRAs. The chart is simply showing that money from other types of places can be rolled into IRA. The chart has nothing to do with a 1 year rule that applies to traditional IRA.




Remember, also, that a lot of things people tend to call "rollover" are not rollovers.

I really need a definitive answer to that, myself. We (foolishly, perhaps) transferred a tIRA from BoA to Fido, and also put a qualified lump-sum distribution from a pension plan into a tIRA at Fido, and so now I am wondering if that means I cannot roll those tIRAs into employee 401(k) plans for a year.

Were these actually rollovers from traditional IRA? Or were they trustee to trustee transfers? Or something else? Both of these terms are discussed just above the chart.

[bUU]

The publication says:

Waiting period between rollovers. Generally, if you make a tax-free rollover of any part of a distribution from a traditional IRA, you cannot, within a 1-year period, make a tax-free rollover of any later distribution from that same IRA. You also cannot make a tax-free rollover of any amount distributed, within the same 1-year period, from the IRA into which you made the tax-free rollover.

That's after a section that outlines lots of different kinds of rollovers (permitted and not permitted). It wouldn't be a stretch to say that the rule applies to all the (permitted) rollovers in that chart.

I think it is a stretch. The chart includes other types of plans (401k. 403b, 457), but the words in the 1 year rule discussion say "distribution from a traditional IRA...."

How is that a stretch? We're talking about a traditional IRA....... the money is going from a traditional IRA into a 401(k).

The whole discussion is about IRAs. The chart is simply showing that money from other types of places can be rolled into IRA. The chart has nothing to do with a 1 year rule that applies to traditional IRA.

Are you sure? The rule appears very shortly after the chart, and the rule is worded such that it gets invoked when money moves out of the tIRA - it doesn't say that the rule is only invoked when the money goes into another IRA. Unless I missed something?

Remember, also, that a lot of things people tend to call "rollover" are not rollovers.

I really need a definitive answer to that, myself. We (foolishly, perhaps) transferred a tIRA from BoA to Fido, and also put a qualified lump-sum distribution from a pension plan into a tIRA at Fido, and so now I am wondering if that means I cannot roll those tIRAs into employee 401(k) plans for a year.

Were these actually rollovers from traditional IRA? Or were they trustee to trustee transfers? Or something else? Both of these terms are discussed just above the chart.

One was from a qualified pension plan (lump-sum distribution) and the other was simply a transfer from one custodian to another. How can I tell the difference between a rollover and a trustee to trustee transfers?

[retiredjg]

The publication says:

Waiting period between rollovers. Generally, if you make a tax-free rollover of any part of a distribution from a traditional IRA, you cannot, within a 1-year period, make a tax-free rollover of any later distribution from that same IRA. You also cannot make a tax-free rollover of any amount distributed, within the same 1-year period, from the IRA into which you made the tax-free rollover.

That's after a section that outlines lots of different kinds of rollovers (permitted and not permitted). It wouldn't be a stretch to say that the rule applies to all the (permitted) rollovers in that chart.

I think it is a stretch. The chart includes other types of plans (401k. 403b, 457), but the words in the 1 year rule discussion say "distribution from a traditional IRA...."

How is that a stretch? We're talking about a traditional IRA....... the money is going from a traditional IRA into a 401(k).

Perhaps you are talking about your own situation? The thread is talking about rolling after-tax money from a 401k to a traditional IRA. That's what I was talking about.

The whole discussion is about IRAs. The chart is simply showing that money from other types of places can be rolled into IRA. The chart has nothing to do with a 1 year rule that applies to traditional IRA.

Are you sure? The rule appears very shortly after the chart, and the rule is worded such that it gets invoked when money moves out of the tIRA - it doesn't say that the rule is only invoked when the money goes into another IRA. Unless I missed something?

If you go up a little, you'll see that the title of that section or sub-section is "Rollover from One IRA to Another".

One was from a qualified pension plan (lump-sum distribution) and the other was simply a transfer from one custodian to another. How can I tell the difference between a rollover and a trustee to trustee transfers?

Above the chart a few inches, these terms are defined and discussed.


I think you are trying to read the IRS publication sentence by sentence to find something you are looking for. In order to understand what they are talking about, you have to read it by sections. Sometimes, you even have to get a bigger picture than that.

[bUU]

Perhaps you are talking about your own situation? The thread is talking about rolling after-tax money from a 401k to a traditional IRA. That's what I was talking about.

Yup, okay.

If you go up a little, you'll see that the title of that section or sub-section is "Rollover from One IRA to Another".

That word "Another" does make a big difference. I didn't make that connection before.

I think you are trying to read the IRS publication sentence by sentence to find something you are looking for.

Actually, I'm trying to read it to not find something. I really want your interpretation to be correct.

[retiredjg]

I don't know your situation, but it doesn't appear to me that either of the transactions you mentioned would be a "rollover" of the type that triggers a 1 year waiting period.

[bUU]

Yup seems so. One other thing I've learned... it is better to read these publications as PDFs rather than HTML. The paragraph and section separations are much clearer.

[Alan S.]

The one rollover limitation does not apply to rollovers between IRAs and other types of retirement plans accepting such rollovers. If Pub 590 is not totally clear on this, the more applicable authority would be the tax code itself. The following is the applicable portion of sub section of Sec 408(d)(3):

(3) Rollover contribution
An amount is described in this paragraph as a rollover contribution if it meets the requirements of subparagraphs (A) and (B).
(A) In general
Paragraph (1) does not apply to any amount paid or distributed out of an individual retirement account or individual retirement annuity to the individual for whose benefit the account or annuity is maintained if—
(i) the entire amount received (including money and any other property) is paid into an individual retirement account or individual retirement annuity (other than an endowment contract) for the benefit of such individual not later than the 60th day after the day on which he receives the payment or distribution; or
(ii) the entire amount received (including money and any other property) is paid into an eligible retirement plan for the benefit of such individual not later than the 60th day after the date on which the payment or distribution is received, except that the maximum amount which may be paid into such plan may not exceed the portion of the amount received which is includible in gross income (determined without regard to this paragraph).
For purposes of clause (ii), the term “eligible retirement plan” means an eligible retirement plan described in clause (iii), (iv), (v), or (vi) of section 402 (c)(8)(B).
(B) Limitation
This paragraph does not apply to any amount described in subparagraph (A)(i) received by an individual from an individual retirement account or individual retirement annuity if at any time during the 1-year period ending on the day of such receipt such individual received any other amount described in that subparagraph from an individual retirement account or an individual retirement annuity which was not includible in his gross income because of the application of this paragraph.

Note that the final paragraph deals with the one rollover limitation. Further, it applies to (A)(i) above {ie IRAs}, but not to (A)(ii) (ie "eligible retirement plans described in clauses (iii, iv, v or vi) of Sec 402(c)(8)(B). These eligible retirement plans do NOT include IRAs which are addressed in clauses (i and ii) of Sec 402(c)(8)(B).

The above may also be difficult for the average person to follow, ie sub sections limitations to limitations. That's why the IRS endeavors to simplify things through IRS Pubs. But even then it's not always easy to interpret the Pubs. In summary, rollovers between IRAs and other non IRA plans DO NOT COUNT against the one rollover limit, whether IRA to non IRA OR non IRA to IRA.

[bUU]

Thanks for the clarification. I did get in touch with my CFP, though she's no tax expert, and this is pretty deep stuff, so she could only say that retiredjg's explanation seemed plausible.

She did raise another issue for me to worry about, that being the matter of co-mingling. Apparently, there are sometimes issues with trying to pass tIRA assets into a 401(k) that were from non-employer sources. I'm pretty sure there are no IRS rules about that, and she agreed that it was only a matter of what the 401(k) custodian would accept. However, I don't understand how they'd know the specific source of money from a tIRA (assuming that they even care).

[Alan S.]

She is correct, and there are definite IRS rules that do NOT permit plans to accept basis from an IRA (either from non deductible contributions or rollover of employer after tax amounts).
1) Employer plans do not have to accept IRA rollovers, but many do.
2) And some plans will only accept rollovers from conduit (aka rollover IRAs). These plans will want to have your IRA titled as a "rollover IRA" to accept the rollover.

They do this because a qualified plan CANNOT accept any IRA basis, and if they get basis in error the plan faces a messy corrective distribution problem. Prior to 2002, an IRA could not accept after tax contribution from an employer plan (eg 401k), but for the last decade a rollover IRA could actually include after tax amounts in it (Form 8606). So these plans may be cutting their odds of getting after tax contributions but they are not eliminating the risk entirely. Further, if you make a regular IRA contribution to a rollover IRA, many custodians do not remove the "rollover" from the IRA.

Therefore, the employer plans will always have the risk of receiving IRA basis, because as you indicated they can never know for sure the source of all of an IRA's balance.

[bUU]

She is correct, and there are definite IRS rules that do NOT permit plans to accept basis from an IRA (either from non deductible contributions or rollover of employer after tax amounts).

Could you please define "basis" in that context? (Googling "basis" does me little good.)

Therefore, the employer plans will always have the risk of receiving IRA basis, because as you indicated they can never know for sure the source of all of an IRA's balance.

Hmmm... How can I check whether these accounts are titled that way? Why would such titling insure that the account doesn't have after-tax contributions?

[Alan S.]

Basis in an IRA is the amount that has already been taxed. It consists of non deductible TIRA contributions or rollovers of after tax amounts distributed from an employer plan. It is recorded on Form 8606 by the taxpayer to prevent future double taxation upon distribution. Of course, you would not want to roll over IRA basis to an employer plan anyway, instead you would want to convert the basis left behind to a Roth IRA.

Again, with loose IRA titling by IRA custodians, there is a decent chance that many "Rollover IRAs" could actually contain after tax amounts, so the title does not assure anything. However, after tax amounts in a rollover IRA are likely to be minimal if any, and the chance of such amounts being rolled to an employer plan is less if the plan limits incoming IRA rollovers to "rollover IRAs".

[Default User BR]

They do this because a qualified plan CANNOT accept any IRA basis, and if they get basis in error the plan faces a messy corrective distribution problem.

Or you'd end up converting non-taxable money to taxable. I'm not sure how likely it would be that the IRS would put together information from 8606 recording basis and the rollover out of the IRA and realize on its own that an illegal rollover took place. It's for certain that the qualified plan would consider it all taxable.


Brian

[bUU]

Okay, but I know it is all pre-tax money, so I don't have to worry about being double-taxed down the line. And according to my CFP there is no way for the 401(k) custodian to know one way or the other, except to ask me. And I suspect that an 401(k) custodian would not have a form for IRA rollovers if they're not going to do 'em. So I think I'm golden. Thanks.

[HopeToGolf]

I

Has anyone tried doing this with Fidelity? I see the option for both "rollovers" and "in-service withdrawals".

The "rollover" option only says "IRA" (doesn't mention a Roth).

Yes. Fidelity holds my 401K and Roth. My employer allows 4 in-service withdrawals a year so I contribute after-tax funds and 4x a year I call Fidelity and ask to do an in-service withdrawal and rollover to my Roth. I have not had a problem the last few years. I ran into reps who had a little bit of a hard time figuring things out probably 2x in 2 years.

Note that I said I call them. I am not sure whether or not this can be done via their site. It is a good site but I prefer the security of speaking to a person for this type of transaction.

I came across conflicting information indicating that a rollover can be performed only once every 12 months being claimed by some documents on the web, while others claim this only applies to IRA to IRA rollovers.
Does anybody have more detailed information on how many 401k to IRA rollovers of after tax contributions we can make? Clearly, some members here seem to be doing more than 1 per 12 mo period.

Thanks!

Frequency is employer specific. In my case, 4x was in my plan documents (at the Fidelity site and via my company's HR system).