401k to Roth IRA indirect rollover conversion - urgent question

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Topic Author
MrRE
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Joined: Mon Feb 19, 2018 7:15 pm

401k to Roth IRA indirect rollover conversion - urgent question

Post by MrRE »

Hi All, I'm trying to do an indirect rollover conversion this year 2021 from 401k to Roth IRA.

I already made the 401k withdrawal request.

I already have the money needed to deposit the amount withdrawn to my existing Roth IRA.

But I'm now afraid to add it to my Roth IRA
because I am afraid I might be making a mistake to do that.
The rules are so tricky!

My big question is:
Is it correct to...
1) take a 401k withdrawal made of pre-tax and after-tax money ($53k)
2) then get it sent to me as a check to me in my name
3) then add the amount withheld for taxes
4) then deposit the total 401k withdrawn amount ($53k) into an existing Roth IRA.

Am I breaking any rules from what you see above?

Everything I've read here and at the IRS site seem to say I'm following the rules.

But I'm worried I might be misinformed or misinterpreting things.

I followed the instructions in
https://www.irs.gov/publications/p590a# ... 1000230605

My 401k withdrawal is from a qualified plan, and it's a qualified eligible rollover distribution.


I need to deposit the funds to my Roth IRA by the end of the year 2021 rather than by 60 days.

So that's why I need replies asap!

Any replies you can give before end of 2021 would be greatly appreciated! Thank you! :happy
Silk McCue
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Re: 401k to Roth IRA indirect rollover conversion - urgent question

Post by Silk McCue »

Please clarify if you have actually received the funds from your 401k. If you haven’t, you can’t just put other funds into the Roth as a rollover for something that has rolled out yet.

Cheers
Topic Author
MrRE
Posts: 54
Joined: Mon Feb 19, 2018 7:15 pm

Re: 401k to Roth IRA indirect rollover conversion - urgent question

Post by MrRE »

Brilliant catch! No, I didn't receive the funds yet.

I received an email that said:
- my 401k withdrawal was approved
- a check will be mailed on Dec. 31

I looked and see the balance of my 401k has been reduced by $53k.

So the money has been removed from my 401k.

In that sense, the distribution has happened.
Silk McCue
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Re: 401k to Roth IRA indirect rollover conversion - urgent question

Post by Silk McCue »

MrRE wrote: Thu Dec 30, 2021 11:33 am Brilliant catch! No, I didn't receive the funds yet.

I received an email that said:
- my 401k withdrawal was approved
- a check will be mailed on Dec. 31

I looked and see the balance of my 401k has been reduced by $53k.

So the money has been removed from my 401k.

In that sense, the distribution has happened.
Since the funds are out of your account I would say that money is fungible and you should be able to perform the rollover. End of year tax reporting on your 401k will report the distribution even if the check were to get lost and they had to reissue the end of year reporting wouldn’t change.

Cheers
User avatar
retiredjg
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Re: 401k to Roth IRA indirect rollover conversion - urgent question

Post by retiredjg »

If the money has left the 401k, I would feel comfortable depositing an equal amount of money into Roth IRA.

I would think the problem might be how to do that between now and end of business tomorrow...end of business might be early. You might have to go to a local bank and open a Roth IRA and deposit a check today.
Topic Author
MrRE
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Joined: Mon Feb 19, 2018 7:15 pm

Re: 401k to Roth IRA indirect rollover conversion - urgent question

Post by MrRE »

Thank you so much for the quick replies
Silk McCue and retiredjg !!! :happy

All I need to do now is
log into my credit union account
and transfer $53K from my savings account
to my existing Roth IRA.

But I'll wait until tomorrow
just in case anyone else sees a problem
with what I'm doing.

Thanks again! :happy
Silk McCue
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Joined: Thu Feb 25, 2016 7:11 pm

Re: 401k to Roth IRA indirect rollover conversion - urgent question

Post by Silk McCue »

MrRE wrote: Thu Dec 30, 2021 12:29 pm Thank you so much for the quick replies
Silk McCue and retiredjg !!! :happy

All I need to do now is
log into my credit union account
and transfer $53K from my savings account
to my existing Roth IRA.

But I'll wait until tomorrow
just in case anyone else sees a problem
with what I'm doing.

Thanks again! :happy
retiredjg is much more knowledgeable than me an we are in agreement. I would absolutely get this submitted by the cutoff at your credit union today or you are opening yourself to a snag tomorrow that might derail your plans.

Please clarify. Is your existing Roth at your CU or elsewhere? The funds have to be in the Roth by end of day tomorrow.

Cheers
Topic Author
MrRE
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Joined: Mon Feb 19, 2018 7:15 pm

Re: 401k to Roth IRA indirect rollover conversion - urgent question

Post by MrRE »

Thanks for asking.

Fortunately, the existing Roth IRA is at my credit union.

So the money can be instantly transferred to the Roth IRA.

If I transfer it today, it will be before the distribution check is created, but that probably doesn't matter.


I guess the main risks in waiting until tomorrow is that

my internet connection could go down

or the bank website could go down.


So I'll make the transfer later today in the evening.

I want to see if anyone else here notices a problem with what I'm doing.

Cheers
FactualFran
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Re: 401k to Roth IRA indirect rollover conversion - urgent question

Post by FactualFran »

MrRE wrote: Thu Dec 30, 2021 12:29 pm All I need to do now is
log into my credit union account
and transfer $53K from my savings account
to my existing Roth IRA.
That should do it if the transfer has an option for you to explicitly indicate that it a rollover, rather than a regular contribution.
an_asker
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Re: 401k to Roth IRA indirect rollover conversion - urgent question

Post by an_asker »

Wow! I didn't think this was possible to do before having the check in hand.

OP, I am assuming you will need to properly reconcile the tax amounts when you file taxes (i.e., the amount withheld might be less or more than what you really owe).
cas
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Re: 401k to Roth IRA indirect rollover conversion - urgent question

Post by cas »

FactualFran wrote: Thu Dec 30, 2021 1:02 pm
MrRE wrote: Thu Dec 30, 2021 12:29 pm All I need to do now is
log into my credit union account
and transfer $53K from my savings account
to my existing Roth IRA.
That should do it if the transfer has an option for you to explicitly indicate that it a rollover, rather than a regular contribution.
+1

The credit union *has* to be informed that the incoming money is a rollover, so that they code the IRS documents (Form 5498) correctly. This may be as simple as a checkbox on a deposit slip. Or not, if they don't have such a checkbox.

In addition, if the checkbox isn't checked, it is possible that their computer will think it is a regular contribution and reject it because it is greater than the $6K/$7K annual contribution limit to Roth.
Topic Author
MrRE
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Joined: Mon Feb 19, 2018 7:15 pm

Re: 401k to Roth IRA indirect rollover conversion - urgent question

Post by MrRE »

FactualFran wrote: Thu Dec 30, 2021 1:02 pm
MrRE wrote: Thu Dec 30, 2021 12:29 pm All I need to do now is
log into my credit union account
and transfer $53K from my savings account
to my existing Roth IRA.
That should do it if the transfer has an option for you to explicitly indicate that it a rollover, rather than a regular contribution.
I have been worried what the Credit Union would think about such a large Roth IRA deposit.

In the past, I looked at the CU fund-transfer webpage.

There is a place for a Memo.

But otherwise it's a typical transfer page were you enter Amount, From/To, Withdrawal date.

When I select To Roth IRA, it shows a !Note that says:
"You can still contribute $7K out of a max limit of $7K for 2021".

But I'm not making contribution, I'm depositing an indirect rollover conversion distribution.

As a test, I entered the $53k number and the webpage didn't give an error notice. But I didn't complete the transaction yet.

I was thinking I could enter a note in the Memo box that explains it is an indirect rollover conversion distribution, not a contribution.

I will call the CU.
Silk McCue
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Re: 401k to Roth IRA indirect rollover conversion - urgent question

Post by Silk McCue »

Just don’t get into the nitty gritty details or mention the transfer in progress. They may be ignorant on this subject. Just tell them it is an Indirect Rollover from your 401k.

You may be better just executing the transaction and only discuss this with them if the system balks once you submit.

A note in the memo box seems reasonable.

Cheers
Alan S.
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Location: Prescott, AZ

Re: 401k to Roth IRA indirect rollover conversion - urgent question

Post by Alan S. »

You requested a distribution, not a direct rollover. You have 60 days from the date of receipt to complete the rollover or to split the rollover contributions (after replacing the withheld amount) into any combination of your TIRA and Roth IRA.

This will be reported on your 2021 return as long as you get a 1099R for 2021 reporting the distribution. And the amount withheld will only go to your 2021 tax withholding account at the IRS if you receive the 2021 1099R. The only impact of completing the Roth rollover in 2022 is that your 5 year holding period for the Roth rollover of pre tax amounts will start in 2022 instead of 2021.

If you decide you do not want a large taxable Roth rollover for 53k less the after tax money, first roll the amount of the pre tax distribution to your TIRA, then roll the after tax portion plus any remaining pre tax portion to your Roth IRA. The order of these rollovers is critical since under IRS rules, the amount rolled over is treated as coming first from the taxable portion of your distribution. Your 2021 taxable income will be increased only by the amount of pre tax dollars you rolled into the Roth IRA. Obviously, you do not want any of the after tax distribution to end up in your TIRA.

This gives you plenty of time to determine how much of the distribution you are willing to pay tax on.

Not sure why you stated that the Roth rollover contribution had to be received by tomorrow.
Topic Author
MrRE
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Joined: Mon Feb 19, 2018 7:15 pm

Re: 401k to Roth IRA indirect rollover conversion - urgent question

Post by MrRE »

an_asker wrote: Thu Dec 30, 2021 1:04 pm Wow! I didn't think this was possible to do before having the check in hand.

OP, I am assuming you will need to properly reconcile the tax amounts when you file taxes (i.e., the amount withheld might be less or more than what you really owe).
Yes, only the required 20% tax was withheld so I would reconcile when I file taxes.

Also before that, I would add to my Q4 estimated tax payment if necessary.


Regarding me making the Roth IRA deposit, I too am concerned that I should wait until Dec 31 when the check gets created. I could "schedule" the deposit later today.
Topic Author
MrRE
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Re: 401k to Roth IRA indirect rollover conversion - urgent question

Post by MrRE »

Silk McCue wrote: Thu Dec 30, 2021 1:47 pm Just don’t get into the nitty gritty details or mention the transfer in progress. They may be ignorant on this subject. Just tell them it is an Indirect Rollover from your 401k.

You may be better just executing the transaction and only discuss this with them if the system balks once you submit.

A note in the memo box seems reasonable.

Cheers
That's exactly what I've been thinking - "just put a simple memo in the box".


Thanks for the good advice. I will not mention any other details.


I can try to call again. But I probably won't get through to anyone who can answer my question anyway.

I tried yesterday and there was an hour wait time.

And getting transferred to someone who can answer my question is always a challenge with my CU. :wink:

Cheers
Silk McCue
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Re: 401k to Roth IRA indirect rollover conversion - urgent question

Post by Silk McCue »

MrRE wrote: Thu Dec 30, 2021 2:03 pm
Silk McCue wrote: Thu Dec 30, 2021 1:47 pm Just don’t get into the nitty gritty details or mention the transfer in progress. They may be ignorant on this subject. Just tell them it is an Indirect Rollover from your 401k.

You may be better just executing the transaction and only discuss this with them if the system balks once you submit.

A note in the memo box seems reasonable.

Cheers
That's exactly what I've been thinking - "just put a simple memo in the box".


Thanks for the good advice. I will not mention any other details.


I can try to call again. But I probably won't get through to anyone who can answer my question anyway.

I tried yesterday and there was an hour wait time.

And getting transferred to someone who can answer my question is always a challenge with my CU. :wink:

Cheers
Read Alan S post above. He is expert level (widely respected here) and brings new information that explains why you can take advantage of the 60 day rollover into next year before pulling the trigger on the rollover to Roth.

Cheers
Topic Author
MrRE
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Re: 401k to Roth IRA indirect rollover conversion - urgent question

Post by MrRE »

Silk McCue wrote: Thu Dec 30, 2021 2:07 pm
MrRE wrote: Thu Dec 30, 2021 2:03 pm
Silk McCue wrote: Thu Dec 30, 2021 1:47 pm Just don’t get into the nitty gritty details or mention the transfer in progress. They may be ignorant on this subject. Just tell them it is an Indirect Rollover from your 401k.

You may be better just executing the transaction and only discuss this with them if the system balks once you submit.

A note in the memo box seems reasonable.

Cheers
That's exactly what I've been thinking - "just put a simple memo in the box".


Thanks for the good advice. I will not mention any other details.


I can try to call again. But I probably won't get through to anyone who can answer my question anyway.

I tried yesterday and there was an hour wait time.

And getting transferred to someone who can answer my question is always a challenge with my CU. :wink:

Cheers
Read Alan S post above. He is expert level (widely respected here) and brings new information that explains why you can take advantage of the 60 day rollover into next year before pulling the trigger on the rollover to Roth.

Cheers
Thanks very much. I read it and am making a reply now.

Cheers
Topic Author
MrRE
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Re: 401k to Roth IRA indirect rollover conversion - urgent question

Post by MrRE »

Alan S. wrote: Thu Dec 30, 2021 1:58 pm You requested a distribution, not a direct rollover. You have 60 days from the date of receipt to complete the rollover or to split the rollover contributions (after replacing the withheld amount) into any combination of your TIRA and Roth IRA.

This will be reported on your 2021 return as long as you get a 1099R for 2021 reporting the distribution. And the amount withheld will only go to your 2021 tax withholding account at the IRS if you receive the 2021 1099R. The only impact of completing the Roth rollover in 2022 is that your 5 year holding period for the Roth rollover of pre tax amounts will start in 2022 instead of 2021.

If you decide you do not want a large taxable Roth rollover for 53k less the after tax money, first roll the amount of the pre tax distribution to your TIRA, then roll the after tax portion plus any remaining pre tax portion to your Roth IRA. The order of these rollovers is critical since under IRS rules, the amount rolled over is treated as coming first from the taxable portion of your distribution. Your 2021 taxable income will be increased only by the amount of pre tax dollars you rolled into the Roth IRA. Obviously, you do not want any of the after tax distribution to end up in your TIRA.

This gives you plenty of time to determine how much of the distribution you are willing to pay tax on.

Not sure why you stated that the Roth rollover contribution had to be received by tomorrow.
Thank you so much for pointing out the options
and especially for raising the timing issue.


I too noticed the 60 day time allowed on in IRS Publication p590.
And p590 says nothing about "conversions by EOY" it seems to me.


But I have seen several websites that say conversions are different and need to be done by Dec 31.

Some websites say the "conversion" needs to be done by Dec. 31.
But, What exactly constitutes "done"?,
I am not sure, so I thought I'd be cautious.

One website also said the money needs to be in the Roth IRA by Dec 31 (but I can't find that link right now).

Here are links that say conversions are due by Dec 31.

- Wells Fargo here https://www.wellsfargo.com/investing/re ... onversion/
says...
Is there a deadline to convert?
Yes, the deadline is December 31 of the current year. A conversion of after-tax amounts is not included in gross income. Any before-tax portion converted will be included in your gross income for the conversion tax year.


- Finance.Zacks.com (which has many articles on 401k to Roth IRA conversion at this link if one scrolls)
https://finance.zacks.com/roll-over-401 ... -4907.html
says...
... the Roth IRA conversion deadline (December 31)... A Roth conversion can only be applied to the tax year in which it occurs.

- HR Block (link is about traditional IRA to Roth IRA conversion, but p590 says 401k to Roth IRA conversion follows same process as for IRAs
https://www.hrblock.com/tax-center/inco ... onversion/
says...
IRA Conversions — You must complete IRA conversions (from a traditional to a Roth) by Dec. 31 of the calendar year.

- irahelp.com
https://www.irahelp.com/forum-post/6331 ... -deadlines
says...
Conversions and qualified rollover contributions (401k directly to Roth IRA) must be done by the end of the current year. Therefore, any such direct rollovers done this year can only be reported on a 2021 1099R and on the participant's 2021 return.

So that's why I thought I'll be cautious and deposit the distribution by Dec. 31.
Maybe they mean that the 401k withdrawal must be completed by Dec 31.

Any insights on the Dec. 31 timing mentioned above would be greatly appreciated. :happy
Last edited by MrRE on Thu Dec 30, 2021 6:09 pm, edited 1 time in total.
diy60
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Re: 401k to Roth IRA indirect rollover conversion - urgent question

Post by diy60 »

OP, maybe it's obvious to others, but why does the conversion "need" to be done by 12/31 ? I'm not following the urgency.
Silk McCue
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Re: 401k to Roth IRA indirect rollover conversion - urgent question

Post by Silk McCue »

diy60 wrote: Thu Dec 30, 2021 4:26 pm OP, maybe it's obvious to others, but why does the conversion "need" to be done by 12/31 ? I'm not following the urgency.
Alan S brought that to light earlier today in his post. There is now no urgency as the OP will have 60 days to complete the indirect rollover. If that all goes into Roth as currently being discussed taxes will be due on the 2021 return.

Cheers
diy60
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Re: 401k to Roth IRA indirect rollover conversion - urgent question

Post by diy60 »

Silk McCue wrote: Thu Dec 30, 2021 4:33 pm
diy60 wrote: Thu Dec 30, 2021 4:26 pm OP, maybe it's obvious to others, but why does the conversion "need" to be done by 12/31 ? I'm not following the urgency.
Alan S brought that to light earlier today in his post. There is now no urgency as the OP will have 60 days to complete the indirect rollover. If that all goes into Roth as currently being discussed taxes will be due on the 2021 return.

Cheers
Correct, but based on the latest post from OP they seem to still be questioning the timing. I was just trying to understand from the OP why they perceive there to be some urgency. The distribution income should hit this year and there is no impact on any potential backdoor Roth because the 401K distribution is going into a Roth IRA. So I guess I'm not seeing where there ever was any urgency other than the timing for the distribution.
Silk McCue
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Re: 401k to Roth IRA indirect rollover conversion - urgent question

Post by Silk McCue »

diy60 wrote: Thu Dec 30, 2021 5:01 pm
Correct, but based on the latest post from OP they seem to still be questioning the timing. I was just trying to understand from the OP why they perceive there to be some urgency. The distribution income should hit this year and there is no impact on any potential backdoor Roth because the 401K distribution is going into a Roth IRA. So I guess I'm not seeing where there ever was any urgency other than the timing for the distribution.
I had just earlier pointed him to Alan S, an expert member, and I expect the OP is just wanting to be fully confident in his understanding. I can appreciate that.

Cheers
Topic Author
MrRE
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Re: 401k to Roth IRA indirect rollover conversion - urgent question

Post by MrRE »

Thanks. My lingering urgency concern was coming from me reading websites that said

"conversions need to be done by Dec. 31".


To resolve part of my urgency concern, I contacted my credit union.

Fortunately I was able to get through to their IRA department on their last business day of the year. :happy

They said the process will take time and can't be done by me just moving money from my credit union savings to my credit union Roth IRA account.

I explained that I want to deposit an indirect rollover conversion distribution, not a contribution.


As people here anticipated, they want me to fill out a rollover form for this indirect rollover.

They also want the paperwork that I get from my 401k, like the 1099-R and 5498.


But when I read their rollover form it says I can send them the form within 30 days after I make the deposit.

Credit Union must receive the rollover form within 30 days following the date of deposit, or the funds will be withdrawn and returned to you.

So perhaps the person I talked to was not giving me the correct information.

It seems I can deposit the funds now per their rollover form.

But the person I talked to said wait until I get the check. So that's what I'll do.


It's still a mystery to me why some web sites I listed earlier above claim that "conversion" must be done by Dec. 31, like pasted below:

You have to complete the conversion by December 31 to include the income in the current tax year; otherwise, the income will be included in the next year.

60 days seems to be the correct answer per everyone else.


Thank you so very much to everyone for explaining so many things so quickly! :happy

This website, the forum, and the forum moderators are totally amazing! :happy
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Eagle33
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Re: 401k to Roth IRA indirect rollover conversion - urgent question

Post by Eagle33 »

I would wait for the check to confirm that it is an indirect rollover/conversion - the check is actually addressed to the OP and 20% tax is withheld. It sounds as if the taxable event, 401k distribution with taxes withheld, happened in 2021. Complete the non-taxable step, rollover into Roth IRA, within 60 days of the 401k distribution.
Rocket science is not “rocket science” to a rocket scientist, just as personal finance is not “rocket science” to a Boglehead.
Alan S.
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Re: 401k to Roth IRA indirect rollover conversion - urgent question

Post by Alan S. »

These financial sites that indicate conversions must be done by 12/31 are likely assuming that all these conversions are being done by direct trustee transfers, but a decent minority of these are done by 60 day rollover.

To encompass both conversion methods, the sites should state that the distribution must be done by 12/31 if the tax impact is to be in the current year. By definition, a conversion is a two part process, a TIRA distribution and a contribution to a Roth IRA. The distribution part must be done by 12/31, the contribution part does not.

As I indicated previously, when the distribution is made in Dec and reported on a 1099R, and the Roth is not funded until January, the conversion is still reported in the prior year, but the Roth custodian will report the conversion contribution in the following year. The tax impact of this is:
1) If the conversion is your first Roth contribution of any type, the 5 year holding period for the Roth to be qualified starts in the year the conversion contribution was received.
2) For purposes of the 5 year holding period to avoid the 10% penalty on the pre tax portion of the conversion, this 5 year period will also start in the year the conversion contribution was received, meaning that you will need to hold the conversion an additional year compared with having the conversion contribution also made in December,

Both of the above implications are relatively minor for most people. The major concern is which year the conversion taxes will be due and the 1099R reports the conversion, and that is based on the distribution year, not the conversion rollover contribution year.

To summarize, these sites should state that the distribution to be converted must be done by 12/31, not the conversion itself.
Topic Author
MrRE
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Re: 401k to Roth IRA indirect rollover conversion - urgent question

Post by MrRE »

Eagle33 wrote: Fri Dec 31, 2021 4:07 pm I would wait for the check to confirm that it is an indirect rollover/conversion - the check is actually addressed to the OP and 20% tax is withheld. It sounds as if the taxable event, 401k distribution with taxes withheld, happened in 2021. Complete the non-taxable step, rollover into Roth IRA, within 60 days of the 401k distribution.
Thank you.

I am waiting for the check to see what it says and what other information is included.


I assume I will receive a check made out to me with 20% taxes taken out.

I assume I am allowed to add the 20% back from other money I have.
Then I will put the total $53k in the Roth IRA within 60 days to make it an indirect rollover / Roth conversion.


In the mean time...

I logged into my 401k account and it said the quoted block below,
and it mentions the word "ROLLOVER" at the end:

Note: I rounded the numbers for discussion purposes.
$23k is the pre-tax part of the distribution.
$30k is the after-tax part of the distribution.
20% listed is below instead of the actual number.
Partial Distribution
Effective Date: Dec 29, 2021

Your Total Payment
Gross Cash Payment $53k

Federal Withholding 20%
New Jersey Withholding $0.00

Net Cash Payment = $53k - 20%

Destination for Cash Paid to You
Net Cash
Amount = $53k - 20%

2021 Taxable Income
Gross Distribution $53k
Nontaxable Credit Received 1: $30k

Reported Federal Taxable Income $23k
Reported New Jersey State Taxable Income $23k
Ordinary Income $23k

Nontaxable Rollover Amount
Nontaxable Amount Applied to Your Rollover $0.00

Remaining Amount Eligible for Rollover
Your Remaining Amount Eligible for Rollover $53k

So the above seems to say a rollover is happening.

This whole process is so mysterious.

I don't understand what it means by:
1) Nontaxable Amount Applied to Your Rollover $0.00
2) Remaining Amount Eligible for Rollover
Your Remaining Amount Eligible for Rollover $53k


I think the 401k information above is leaving out words like DIRECT and INDIRECT.

I think it should say:
Nontaxable DIRECT Rollover Amount: 0

And I think it should say
Remaining Amount Eligible for INDIRECT Rollover: $53k


But I don't know. I am waiting for the check and any attached paperwork to see that it says about rollover.

Any insights would be appreciated about "Eligible for Rollover".
Thank you.
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retiredjg
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Re: 401k to Roth IRA indirect rollover conversion - urgent question

Post by retiredjg »

MrRE wrote: Thu Jan 06, 2022 12:35 pm
Eagle33 wrote: Fri Dec 31, 2021 4:07 pm I would wait for the check to confirm that it is an indirect rollover/conversion - the check is actually addressed to the OP and 20% tax is withheld. It sounds as if the taxable event, 401k distribution with taxes withheld, happened in 2021. Complete the non-taxable step, rollover into Roth IRA, within 60 days of the 401k distribution.
Thank you.

I am waiting for the check to see what it says and what other information is included.


I assume I will receive a check made out to me with 20% taxes taken out.

I assume I am allowed to add the 20% back from other money I have.
Then I will put the total $53k in the Roth IRA within 60 days to make it an indirect rollover / Roth conversion.


In the mean time...

I logged into my 401k account and it said the quoted block below,
and it mentions the word "ROLLOVER" at the end:

Note: I rounded the numbers for discussion purposes.
$23k is the pre-tax part of the distribution.
$30k is the after-tax part of the distribution.
20% listed is below instead of the actual number.
Partial Distribution
Effective Date: Dec 29, 2021

Your Total Payment
Gross Cash Payment $53k

Federal Withholding 20%
New Jersey Withholding $0.00

Net Cash Payment = $53k - 20%

Destination for Cash Paid to You
Net Cash
Amount = $53k - 20%

2021 Taxable Income
Gross Distribution $53k
Nontaxable Credit Received 1: $30k

Reported Federal Taxable Income $23k
Reported New Jersey State Taxable Income $23k
Ordinary Income $23k

Nontaxable Rollover Amount
Nontaxable Amount Applied to Your Rollover $0.00

Remaining Amount Eligible for Rollover
Your Remaining Amount Eligible for Rollover $53k

So the above seems to say a rollover is happening.

This whole process is so mysterious.

I don't understand what it means by:
1) Nontaxable Amount Applied to Your Rollover $0.00
2) Remaining Amount Eligible for Rollover
Your Remaining Amount Eligible for Rollover $53k
I do not think it says a rollover is happening. For all they know, you plan to cash the check and take a cruise.

What they do say is that $53k of this distribution (the entire distribution) is eligible to be rolled over into IRA. This is the paperwork your CU needs in order to confirm that the money you are giving them actually is eligible to be a rollover. Without something like this paperwork, you could simply send the CU any amount of money you want and call it a rollover even though it isn't from your 401k account.

I think the 401k information above is leaving out words like DIRECT and INDIRECT.
The 401k has no idea what you intend to do with the money. Even if you told them your intent, they have no way of knowing what you actually do.

What they know is they distributed $53k and some of that went to uncle Sam for taxes. It is not their job to know that you intend to do an indirect rollover. Only you know that. And until you put the money in IRA, it is still just a partially taxable distribution of cash to you. The indirect rollover does not actually occur until you put the money into IRA/Roth IRA within the 60 day time frame.


Regarding your earlier question about December 31....it took me some time to see the obvious....This money, or at least the taxable part of it, became taxable when they distributed the money to you.

Even if you never put it in Roth IRA (i.e. even if a conversion never occurs) it is still part of your taxable income for 2021. That is why it has nothing to do with finishing before December 31. It's taxable anyway.

If you wanted the taxable part to not be taxed in 2021, you still have the entire 60 days to put that part into tIRA rather than Roth IRA.

You should have seen the check by now. Let us know what happens.
Topic Author
MrRE
Posts: 54
Joined: Mon Feb 19, 2018 7:15 pm

Re: 401k to Roth IRA indirect rollover conversion - urgent question

Post by MrRE »

retiredjg wrote: Sun Jan 09, 2022 1:35 pm
MrRE wrote: Thu Jan 06, 2022 12:35 pm
Eagle33 wrote: Fri Dec 31, 2021 4:07 pm I would wait for the check to confirm that it is an indirect rollover/conversion - the check is actually addressed to the OP and 20% tax is withheld. It sounds as if the taxable event, 401k distribution with taxes withheld, happened in 2021. Complete the non-taxable step, rollover into Roth IRA, within 60 days of the 401k distribution.
Thank you.

I am waiting for the check to see what it says and what other information is included.


I assume I will receive a check made out to me with 20% taxes taken out.

I assume I am allowed to add the 20% back from other money I have.
Then I will put the total $53k in the Roth IRA within 60 days to make it an indirect rollover / Roth conversion.


In the mean time...

I logged into my 401k account and it said the quoted block below,
and it mentions the word "ROLLOVER" at the end:

Note: I rounded the numbers for discussion purposes.
$23k is the pre-tax part of the distribution.
$30k is the after-tax part of the distribution.
20% listed is below instead of the actual number.
Partial Distribution
Effective Date: Dec 29, 2021

Your Total Payment
Gross Cash Payment $53k

Federal Withholding 20%
New Jersey Withholding $0.00

Net Cash Payment = $53k - 20%

Destination for Cash Paid to You
Net Cash
Amount = $53k - 20%

2021 Taxable Income
Gross Distribution $53k
Nontaxable Credit Received 1: $30k

Reported Federal Taxable Income $23k
Reported New Jersey State Taxable Income $23k
Ordinary Income $23k

Nontaxable Rollover Amount
Nontaxable Amount Applied to Your Rollover $0.00

Remaining Amount Eligible for Rollover
Your Remaining Amount Eligible for Rollover $53k

So the above seems to say a rollover is happening.

This whole process is so mysterious.

I don't understand what it means by:
1) Nontaxable Amount Applied to Your Rollover $0.00
2) Remaining Amount Eligible for Rollover
Your Remaining Amount Eligible for Rollover $53k
I do not think it says a rollover is happening. For all they know, you plan to cash the check and take a cruise.

What they do say is that $53k of this distribution (the entire distribution) is eligible to be rolled over into IRA. This is the paperwork your CU needs in order to confirm that the money you are giving them actually is eligible to be a rollover. Without something like this paperwork, you could simply send the CU any amount of money you want and call it a rollover even though it isn't from your 401k account.

I think the 401k information above is leaving out words like DIRECT and INDIRECT.
The 401k has no idea what you intend to do with the money. Even if you told them your intent, they have no way of knowing what you actually do.

What they know is they distributed $53k and some of that went to uncle Sam for taxes. It is not their job to know that you intend to do an indirect rollover. Only you know that. And until you put the money in IRA, it is still just a partially taxable distribution of cash to you. The indirect rollover does not actually occur until you put the money into IRA/Roth IRA within the 60 day time frame.


Regarding your earlier question about December 31....it took me some time to see the obvious....This money, or at least the taxable part of it, became taxable when they distributed the money to you.

Even if you never put it in Roth IRA (i.e. even if a conversion never occurs) it is still part of your taxable income for 2021. That is why it has nothing to do with finishing before December 31. It's taxable anyway.

If you wanted the taxable part to not be taxed in 2021, you still have the entire 60 days to put that part into tIRA rather than Roth IRA.

You should have seen the check by now. Let us know what happens.
Thank you very much for all your thoughts.

I totally agree with all that you said above.

Everything you said above was essentially my expectation and understanding of the situation also even though I had slight uncertainties.


The topic of this Forum Topic was originally how to do a Roth indirect conversion properly especially if it needed to be done before the end of the year.

My question was:
Is it correct to...
1) take a 401k withdrawal made of pre-tax and after-tax money ($53k)
2) then get it sent to me as a check to me in my name
3) then add the amount withheld for taxes
4) then deposit the total 401k withdrawn amount ($53k) into an existing Roth IRA.
Am I breaking any rules from what you see above?

I believe that I am not breaking any rules based what I have read from the IRS and the web
and from the many great insights others here have so kindly shared.


My remaining related concern is making my Roth IRA custodian accept my 60 day indirect rollover Roth conversion from my 401k distribution including the 20% I am allowed to add back in.



Now that I got the check Saturday Jan 8 with an attached note, I will contact my credit union Monday.


From my conversations earlier, it seems my credit union and bank don't understand or allow the indirect rollover Roth conversion process the way brokerages do.


I know a brokerage firm that uses an "attest" process.
I would have to fill out an IRA deposit form where I "attest" that my rollover is eligible.

But banks and credit unions seem to have a different process and seem to be much more restrictive and/or perhaps the people I am talking to just don't understand the rules in this situation.


So think I may need to find another credit union or bank.
So I created another Forum Topic for that question.


Let me call my credit union and and bank Monday and see if they think I am breaking the rules and if either will let me complete this Roth IRA rollover conversion.


I got the check yesterday Saturday Jan 8.
I have yet to talk to the 401k custodian about it.
I want to ask them about the "Code" numbers and what they mean and who will want them.


The 401k distribution check has a note physically attached that says:

Payment Types:
Partial Payment TX Code: 420 $23K (for the taxable part of the 401k distribution)
Partial Payment NTX Code: 421 $30K (for the pre-tax, non-taxable part of the 401k distribution)
Employee Contribution* Code: 961 $30K (* means payment types not included in the totals)
Total payment $53K
A "Reference Number" is also provided.

Then the numbers above are restated regarding taxes and benefit summary as shown below:

TAXES
Fed Withholding: (the 20% dollar value is listed)

BENEFIT SUMMARY: ($53k minus 20% taxes = net = amount of the check)


That's all the 401k check and attached note say.
It doesn't seem to be an IRS Form.
There is no IRS Form number.
I have no idea what the Codes mean and who would use them.


So I will call the 401k custodian and ask what the code numbers are on Monday.

I will then call the credit union also and see what they say about accepting my deposit including me adding in the 20% withheld.

I hope they say I did this indirect rollover Roth conversion process properly so far.

I hope they accept my check with the 20% tax added back in so the rollover actually happens.

I will let you know asap. Thanks everyone :happy
Please forgive any typos above if any.
User avatar
retiredjg
Posts: 46683
Joined: Thu Jan 10, 2008 12:56 pm

Re: 401k to Roth IRA indirect rollover conversion - urgent question

Post by retiredjg »

I think what you want to show them is that other thing you got that said "Your Remaining Amount Eligible for Rollover $53k".

I would expect that along with a check for $53k would be all you need to do.
User avatar
celia
Posts: 13852
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Location: SoCal

Re: 401k to Roth IRA indirect rollover conversion - urgent question

Post by celia »

MrRE wrote: Sun Jan 09, 2022 7:49 pm The topic of this Forum Topic was originally how to do a Roth indirect conversion properly especially if it needed to be done before the end of the year.

My question was:
Is it correct to...
1) take a 401k withdrawal made of pre-tax and after-tax money ($53k)
2) then get it sent to me as a check to me in my name
3) then add the amount withheld for taxes
4) then deposit the total 401k withdrawn amount ($53k) into an existing Roth IRA.
Am I breaking any rules from what you see above?
The answers are:
1) Yes, as long as the breakdown between the two parts is specified by the 401K custodian.

2) Yes, but when the check is made out to you, it is called an INDIRECT Rollover. When the check is made out to a new custodian, it is called a DIRECT Rollover, even if it is mailed to you. You can do the DIRECT rollover as often as the plan allows. But when you do an INDIRECT rollover, you have to wait 365 days until you can do another one. If you do another one, the penalties are severe! Have you had another rollover check made out to you within the last year?

3) Yes
4) Yes
You're doing fine!
The 401k distribution check has a note physically attached that says:

Payment Types:
Partial Payment TX Code: 420 $23K (for the taxable part of the 401k distribution)
Partial Payment NTX Code: 421 $30K (for the pre-tax, non-taxable part of the 401k distribution)
Employee Contribution* Code: 961 $30K (* means payment types not included in the totals)
Total payment $53K
A "Reference Number" is also provided.

. . . I have no idea what the Codes mean and who would use them.
The codes appear to be for use of the 401K custodian to help them internally generate the 1099-R tax forms properly. You will get one tax form for the taxable part ($23K) being a normal distribution ("7" on the tax form, box 7). The other form will be for the Roth part ($30K that was previously taxed when you converted (contributed) it to a Roth 401K previously. It is actually for the post-tax part of the 401K distribution, not pre-tax.
A dollar in Roth is worth more than a dollar in a taxable account. A dollar in taxable is worth more than a dollar in a tax-deferred account.
User avatar
celia
Posts: 13852
Joined: Sun Mar 09, 2008 6:32 am
Location: SoCal

Re: 401k to Roth IRA indirect rollover conversion - urgent question

Post by celia »

MrRE wrote: Sun Jan 09, 2022 7:49 pm From my conversations earlier, it seems my credit union and bank don't understand or allow the indirect rollover Roth conversion process the way brokerages do.

...But banks and credit unions seem to have a different process and seem to be much more restrictive and/or perhaps the people I am talking to just don't understand the rules in this situation.

So think I may need to find another credit union or bank.
So I created another Forum Topic for that question.
With all due respect, I would suggest that maybe you are not familiar with all the correct terminology. I think you may be asking them questions that don't quite make sense. For example, above, you wrote:
I explained that I want to deposit an indirect rollover conversion distribution, not a contribution.
The bank/CU certainly understood each word, but they are not usually strung together like this. I would have left off the "indirect" because that is obvious if you walk in or mail the check(s) and paperwork as opposed to two institutions exchanging the money and the associated data. And leave off the "distribution" since that part was done by the 401K custodian. The transfer of the Roth to Roth is a rollover, but different than the pre-tax to Roth which is a Roth conversion (besides a "rollover"). You snuck 3 transactions in there (a Roth rollover, a Roth conversion, a return of withheld taxes) and then assume someone will understand all that? I suspect they probably have more difficulty understanding what you want than you understanding them.
:oops:
I would have said "I want to do a Roth rollover, a Roth conversion, and replace withheld taxes all into my existing Roth IRA."

Do you think that could just be a communication problem?
A dollar in Roth is worth more than a dollar in a taxable account. A dollar in taxable is worth more than a dollar in a tax-deferred account.
Topic Author
MrRE
Posts: 54
Joined: Mon Feb 19, 2018 7:15 pm

Re: 401k to Roth IRA indirect rollover conversion - urgent question

Post by MrRE »

retiredjg wrote: Sun Jan 09, 2022 8:31 pm I think what you want to show them is that other thing you got that said "Your Remaining Amount Eligible for Rollover $53k".

I would expect that along with a check for $53k would be all you need to do.
Thank retiredjg :happy

I talked to my credit union Monday.

1) They said didn't need any proof from the 401k saying the funds are eligible for rollover.

They just want me to sign their authorization form where I "attest" that it's eligible for rollover and funds were received by me within 60 days.


2) They didn't like the idea of me putting an indirect rollover right into a Roth IRA.

They are accustomed to having people first put the funds in a conduit rollover t-IRA.

I explained that a conduit rollover t-IRA is not needed because the IRS says in the "safe harbor notice" that rollovers can go from a 401k right to a Roth IRA.

So they finally agreed I can request my funds go right into my existing Roth IRA.

But I have one more major major concern I will put in a message below.
Topic Author
MrRE
Posts: 54
Joined: Mon Feb 19, 2018 7:15 pm

Re: 401k to Roth IRA indirect rollover conversion - urgent question

Post by MrRE »

Before I submit my signed request, I have one remaining major major concern.


I am very concerned that my 401k partial distribution includes after-tax contributions.

The IRS seems to be very picky about rolling over after-tax contributions to a Roth IRA.

Especially if the rollover is just a partial distribution from the 401k.


So I searched the IRS site and the web about after-tax rollover rules.

It really concerns me that the IRS rollover chart seems to exclude "after-tax" rollovers to Roth IRAs.

The IRS rollover chart https://www.irs.gov/pub/irs-tege/rollover_chart.pdf
explicitly says just "pre-tax", not "after-tax" as shown below
...................Roll To: Roth IRA
Roll From:
Qualified Plan(1)......... Yes(3)
(pre-tax)
(1) Qualified plans include, for example, profit-sharing, 401(k), money purchase, and defined benefit plans.
(3) Must include in income.
That has always bothered me greatly because I know they are not being accurate.

Does anyone know where the IRS says partial distributions with after-tax contributions can be rolled over to a Roth IRA?


Also I have seen this on the website
https://www.fidelity.com/viewpoints/ret ... r-guidance
that
... to roll over a partial amount of after-tax contributions, all the taxable amounts of your plan must be rolled over. That is per the Internal Revenue Code “ordering rule.”2
So my 2 big questions holding me back are:

1) Am I breaking any IRS rules by rolling over a partial 401k distribution that contains after-tax contributions into a Roth IRA?

2) Why does the IRS rollover chart just say "pre-tax" for allowed rollovers from 401k's to Roth IRA?
Last edited by MrRE on Tue Jan 11, 2022 7:41 pm, edited 1 time in total.
Topic Author
MrRE
Posts: 54
Joined: Mon Feb 19, 2018 7:15 pm

Re: 401k to Roth IRA indirect rollover conversion - urgent question

Post by MrRE »

Eagle33 wrote: Fri Dec 31, 2021 4:07 pm I would wait for the check to confirm that it is an indirect rollover/conversion - the check is actually addressed to the OP and 20% tax is withheld. It sounds as if the taxable event, 401k distribution with taxes withheld, happened in 2021. Complete the non-taxable step, rollover into Roth IRA, within 60 days of the 401k distribution.
Thank you Eagle33 :happy

I got the check and the 20% was withheld.

I got a 401k payment history noticed that said the total amount is eligible for rollover, not that anyone will ever see that but me.

The credit union seems willing to take the money from my savings and put it into my Roth IRA.

I just have one major concern I explained in my message above this reply about after-tax concerns.
Topic Author
MrRE
Posts: 54
Joined: Mon Feb 19, 2018 7:15 pm

Re: 401k to Roth IRA indirect rollover conversion - urgent question

Post by MrRE »

Alan S. wrote: Fri Dec 31, 2021 8:58 pm These financial sites that indicate conversions must be done by 12/31 are likely assuming that all these conversions are being done by direct trustee transfers, but a decent minority of these are done by 60 day rollover.

To encompass both conversion methods, the sites should state that the distribution must be done by 12/31 if the tax impact is to be in the current year. By definition, a conversion is a two part process, a TIRA distribution and a contribution to a Roth IRA. The distribution part must be done by 12/31, the contribution part does not.

As I indicated previously, when the distribution is made in Dec and reported on a 1099R, and the Roth is not funded until January, the conversion is still reported in the prior year, but the Roth custodian will report the conversion contribution in the following year. The tax impact of this is:
1) If the conversion is your first Roth contribution of any type, the 5 year holding period for the Roth to be qualified starts in the year the conversion contribution was received.
2) For purposes of the 5 year holding period to avoid the 10% penalty on the pre tax portion of the conversion, this 5 year period will also start in the year the conversion contribution was received, meaning that you will need to hold the conversion an additional year compared with having the conversion contribution also made in December,

Both of the above implications are relatively minor for most people. The major concern is which year the conversion taxes will be due and the 1099R reports the conversion, and that is based on the distribution year, not the conversion rollover contribution year.

To summarize, these sites should state that the distribution to be converted must be done by 12/31, not the conversion itself.
Thank you Alan S. :happy

I saw your post back when you posted it and that helped me very much then.
Sorry for the late reply. I'm catching up on my replies because I got so many back then.

I greatly appreciate the timing insights. I never would have imagined how it works in this case.

Also I appreciate your insights about other websites say because they were worrying me.


I just have one major concern I explained in my message above this reply about after-tax concerns.

I hope you can take a look at it above at this link
viewtopic.php?p=6443567#p6443567

Thanks again! :happy
Last edited by MrRE on Tue Jan 11, 2022 8:34 pm, edited 1 time in total.
Topic Author
MrRE
Posts: 54
Joined: Mon Feb 19, 2018 7:15 pm

Re: 401k to Roth IRA indirect rollover conversion - urgent question

Post by MrRE »

celia wrote: Mon Jan 10, 2022 2:54 am
MrRE wrote: Sun Jan 09, 2022 7:49 pm The topic of this Forum Topic was originally how to do a Roth indirect conversion properly especially if it needed to be done before the end of the year.

My question was:
Is it correct to...
1) take a 401k withdrawal made of pre-tax and after-tax money ($53k)
2) then get it sent to me as a check to me in my name
3) then add the amount withheld for taxes
4) then deposit the total 401k withdrawn amount ($53k) into an existing Roth IRA.
Am I breaking any rules from what you see above?
The answers are:
1) Yes, as long as the breakdown between the two parts is specified by the 401K custodian.

2) Yes, but when the check is made out to you, it is called an INDIRECT Rollover. When the check is made out to a new custodian, it is called a DIRECT Rollover, even if it is mailed to you. You can do the DIRECT rollover as often as the plan allows. But when you do an INDIRECT rollover, you have to wait 365 days until you can do another one. If you do another one, the penalties are severe! Have you had another rollover check made out to you within the last year?

3) Yes
4) Yes
You're doing fine!
The 401k distribution check has a note physically attached that says:

Payment Types:
Partial Payment TX Code: 420 $23K (for the taxable part of the 401k distribution)
Partial Payment NTX Code: 421 $30K (for the pre-tax, non-taxable part of the 401k distribution)
Employee Contribution* Code: 961 $30K (* means payment types not included in the totals)
Total payment $53K
A "Reference Number" is also provided.

. . . I have no idea what the Codes mean and who would use them.
The codes appear to be for use of the 401K custodian to help them internally generate the 1099-R tax forms properly. You will get one tax form for the taxable part ($23K) being a normal distribution ("7" on the tax form, box 7). The other form will be for the Roth part ($30K that was previously taxed when you converted (contributed) it to a Roth 401K previously. It is actually for the post-tax part of the 401K distribution, not pre-tax.
Thank you celia :happy

It's good to know I'm doing fine for all of my questions above. :happy

Related to question 2 above (for 1-rollover-per-365 day rule), I think the INDIRECT doesn't matter because I think the 365 day rule does not apply to any rollover from a 401k.

See here https://www.irs.gov/retirement-plans/pl ... tributions

where it says
IRA one-rollover-per-year rule
The one-per year limit does not apply to:
rollovers from traditional IRAs to Roth IRAs (conversions)
trustee-to-trustee transfers to another IRA
IRA-to-plan rollovers
plan-to-IRA rollovers
plan-to-plan rollovers
Regarding the Codes on my 401k check, you are right. My 401k custodian said exactly what you said.
Also thanks for pointing out my typo. I meant to type "after-tax" as you said.

I just have one major concern I explained in my message above this reply about after-tax concerns.

I hope you can take a look at it above at this link
viewtopic.php?p=6443567#p6443567

Thanks again! :happy
Last edited by MrRE on Tue Jan 11, 2022 8:34 pm, edited 1 time in total.
Silk McCue
Posts: 6506
Joined: Thu Feb 25, 2016 7:11 pm

Re: 401k to Roth IRA indirect rollover conversion - urgent question

Post by Silk McCue »

Indirect rollover from 401k to IRA is not limited to once every full year as you have found.IRA to IRA or Roth is limited. I didn’t know about the distinction until last year myself.

Cheers
Topic Author
MrRE
Posts: 54
Joined: Mon Feb 19, 2018 7:15 pm

Re: 401k to Roth IRA indirect rollover conversion - urgent question

Post by MrRE »

celia wrote: Mon Jan 10, 2022 3:01 am
MrRE wrote: Sun Jan 09, 2022 7:49 pm From my conversations earlier, it seems my credit union and bank don't understand or allow the indirect rollover Roth conversion process the way brokerages do.

...But banks and credit unions seem to have a different process and seem to be much more restrictive and/or perhaps the people I am talking to just don't understand the rules in this situation.

So think I may need to find another credit union or bank.
So I created another Forum Topic for that question.
With all due respect, I would suggest that maybe you are not familiar with all the correct terminology. I think you may be asking them questions that don't quite make sense. For example, above, you wrote:
I explained that I want to deposit an indirect rollover conversion distribution, not a contribution.
The bank/CU certainly understood each word, but they are not usually strung together like this. I would have left off the "indirect" because that is obvious if you walk in or mail the check(s) and paperwork as opposed to two institutions exchanging the money and the associated data. And leave off the "distribution" since that part was done by the 401K custodian. The transfer of the Roth to Roth is a rollover, but different than the pre-tax to Roth which is a Roth conversion (besides a "rollover"). You snuck 3 transactions in there (a Roth rollover, a Roth conversion, a return of withheld taxes) and then assume someone will understand all that? I suspect they probably have more difficulty understanding what you want than you understanding them.
:oops:
I would have said "I want to do a Roth rollover, a Roth conversion, and replace withheld taxes all into my existing Roth IRA."

Do you think that could just be a communication problem?
Thank you celia :happy

I totally agree that my mis-use of the standard terminology and my abnormal ways of saying things is a very big part of the problem for the credit union and bank people.

Also, it was very insightful that you pointed out that my using "transaction" words can confuse them.

I found that they are very sensitive to what exact transaction words are used in discussion. They said each transaction word means something very specific and might not be appropriate for what I want to do.

So they too suggested I be careful and not use transaction terms or use their "transaction forms" unless they say they are correct for this situation.

Basically they want me to just say:
I want to do a "Roth IRA Rollover Authorization"
and they want me to check the box on the form that it's coming from funds I received from my 401k within 60 days.


So I just have one major concern I explained in my message above this reply about after-tax concerns.

I hope you can take a look at it above at this link
viewtopic.php?p=6443567#p6443567

Thanks again! :happy
Last edited by MrRE on Tue Jan 11, 2022 8:35 pm, edited 3 times in total.
Topic Author
MrRE
Posts: 54
Joined: Mon Feb 19, 2018 7:15 pm

Re: 401k to Roth IRA indirect rollover conversion - urgent question

Post by MrRE »

Silk McCue wrote: Tue Jan 11, 2022 7:15 pm Indirect rollover from 401k to IRA is not limited to once every full year as you have found.IRA to IRA or Roth is limited. I didn’t know about the distinction until last year myself.

Cheers
Thank you Silk McCue :happy

Cheers

I just have one major concern I explained in my message above this reply about after-tax concerns.

I hope you can take a look at it above. Thanks again! :happy
Silk McCue
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Joined: Thu Feb 25, 2016 7:11 pm

Re: 401k to Roth IRA indirect rollover conversion - urgent question

Post by Silk McCue »

MrRE wrote: Tue Jan 11, 2022 7:31 pm
I just have one major concern I explained in my message above this reply about after-tax concerns.

I hope you can take a look at it above. Thanks again! :happy
Sorry but that isn’t a situation I am familiar with.

Cheers
User avatar
retiredjg
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Re: 401k to Roth IRA indirect rollover conversion - urgent question

Post by retiredjg »

MrRE wrote: Tue Jan 11, 2022 5:37 pm Before I submit my signed request, I have one remaining major major concern.


I am very concerned that my 401k partial distribution includes after-tax contributions.

The IRS seems to be very picky about rolling over after-tax contributions to a Roth IRA.
Not sure why you think that. After-tax contributions are rolled into Roth IRA every day.

Especially if the rollover is just a partial distribution from the 401k.
Again, this happens every day.

So I searched the IRS site and the web about after-tax rollover rules.

It really concerns me that the IRS rollover chart seems to exclude "after-tax" rollovers to Roth IRAs.

The IRS rollover chart https://www.irs.gov/pub/irs-tege/rollover_chart.pdf
explicitly says just "pre-tax", not "after-tax" as shown below
...................Roll To: Roth IRA
Roll From:
Qualified Plan(1)......... Yes(3)
(pre-tax)
(1) Qualified plans include, for example, profit-sharing, 401(k), money purchase, and defined benefit plans.
(3) Must include in income.
That has always bothered me greatly because I know they are not being accurate.
The chart is accurate. There are things that may not be included in the chart. That does not mean the chart is not accurate. It just does not cover everything. Sometimes charts are like that.

Does anyone know where the IRS says partial distributions with after-tax contributions can be rolled over to a Roth IRA?
I don't know where it says that, but I know this happens all the time.


1) Am I breaking any IRS rules by rolling over a partial 401k distribution that contains after-tax contributions into a Roth IRA?
No.

2) Why does the IRS rollover chart just say "pre-tax" for allowed rollovers from 401k's to Roth IRA?[/b]
Because the rollover chart does not include information about after-tax accounts, only pre-tax accounts and designated Roth accounts. That does not mean that what you want to do is not permitted.


Let's backup to your original post. You say you want to rollover "after-tax" money. You do not mention this being Roth money, just after-tax. This seems to indicate that you have one of the 401k plans that has an after-tax account option. Not all do.

Rolling after-tax money (not Roth) to Roth IRA is one way to accomplish the "mega-backdoor Roth" that gets discussed here every day. There are thousands of posts that discuss this. Maybe hundreds of thousands. Do you think it would be getting discussed that much if people were doing what they are not allowed to do? Of course not. This has been allowed for decades. It is one of the things that pending legislation might put an end to. This is a real thing. You are allowed to do it.

There is a Wiki page concerning the "mega-backdoor Roth". Read it. If that is what you are doing, it is allowed. If that is not what you are doing, we need to start over at the beginning and discuss what it is that you are doing.
Topic Author
MrRE
Posts: 54
Joined: Mon Feb 19, 2018 7:15 pm

Re: 401k to Roth IRA indirect rollover conversion - urgent question

Post by MrRE »

retiredjg wrote: Tue Jan 11, 2022 8:06 pm
MrRE wrote: Tue Jan 11, 2022 5:37 pm Before I submit my signed request, I have one remaining major major concern.


I am very concerned that my 401k partial distribution includes after-tax contributions.

The IRS seems to be very picky about rolling over after-tax contributions to a Roth IRA.
Not sure why you think that. After-tax contributions are rolled into Roth IRA every day.

Especially if the rollover is just a partial distribution from the 401k.
Again, this happens every day.

So I searched the IRS site and the web about after-tax rollover rules.

It really concerns me that the IRS rollover chart seems to exclude "after-tax" rollovers to Roth IRAs.

The IRS rollover chart https://www.irs.gov/pub/irs-tege/rollover_chart.pdf
explicitly says just "pre-tax", not "after-tax" as shown below
...................Roll To: Roth IRA
Roll From:
Qualified Plan(1)......... Yes(3)
(pre-tax)
(1) Qualified plans include, for example, profit-sharing, 401(k), money purchase, and defined benefit plans.
(3) Must include in income.
That has always bothered me greatly because I know they are not being accurate.
The chart is accurate. There are things that may not be included in the chart. That does not mean the chart is not accurate. It just does not cover everything. Sometimes charts are like that.

Does anyone know where the IRS says partial distributions with after-tax contributions can be rolled over to a Roth IRA?
I don't know where it says that, but I know this happens all the time.


1) Am I breaking any IRS rules by rolling over a partial 401k distribution that contains after-tax contributions into a Roth IRA?
No.

2) Why does the IRS rollover chart just say "pre-tax" for allowed rollovers from 401k's to Roth IRA?[/b]
Because the rollover chart does not include information about after-tax accounts, only pre-tax accounts and designated Roth accounts. That does not mean that what you want to do is not permitted.


Let's backup to your original post. You say you want to rollover "after-tax" money. You do not mention this being Roth money, just after-tax. This seems to indicate that you have one of the 401k plans that has an after-tax account option. Not all do.

Rolling after-tax money (not Roth) to Roth IRA is one way to accomplish the "mega-backdoor Roth" that gets discussed here every day. There are thousands of posts that discuss this. Maybe hundreds of thousands. Do you think it would be getting discussed that much if people were doing what they are not allowed to do? Of course not. This has been allowed for decades. It is one of the things that pending legislation might put an end to. This is a real thing. You are allowed to do it.

There is a Wiki page concerning the "mega-backdoor Roth". Read it. If that is what you are doing, it is allowed. If that is not what you are doing, we need to start over at the beginning and discuss what it is that you are doing.
Thanks retiredjg :happy

Yes, my 401k plan allowed "after-tax" money.


I totally agree that lots and lots of people move after-tax to a Roth IRA using a conduit IRA as a back-door.

But remember, lots and lots also make mistakes doing those rollovers.


And a backdoor Roth IRA via tIRA
is different than
a plan-to-Roth IRA rollover I'm doing.


I totally realize people are moving partial distributions including after-tax to Roth IRAs.

But before I make a move, I just want to see where the IRS says that's allowed, in all it's aspects.


My last concern is the after-tax part.

I've done a lot of searching and the IRS doesn't explicitly mention the after-tax partial distribution rollover I want to do.

https://www.irs.gov/retirement-plans/ro ... ment-plans

But they do say a lot of complicated things about after-tax contributions and how they should be handled in other places, especially n2014-54.


So I want to make sure I'm not breaking the rules regarding the after-tax part.


The reason for my concern is I know the IRS is very very fussy about after-tax money going to Roth IRAs.

I've read that many times on the web.

That's why they have rules like the ordering rule.


The rules are very tricky. Most people don't understand them all properly. They just have a very partial understanding.

So I'm very cautions about any websites, advisors, and even consultants.


The thing about the tax code is it's so complicated and poorly written that it's a mess.

This article is a good example explaining how messy the IRS codes is (especially before n2014-54 was written).
https://www.marketwatch.com/story/rolli ... 2013-12-27


So I just want to be sure I carefully read the all rules that affect my situation and avoid "gray" zones if possible.


Thanks for all your insights. :happy

I'm so appreciative of this forum because this is the one place where murky tax issues can get some daylight. :happy
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celia
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Re: 401k to Roth IRA indirect rollover conversion - urgent question

Post by celia »

Here you go:
MrRE wrote: Tue Jan 11, 2022 5:37 pm
So my 2 big questions holding me back are:

1) Am I breaking any IRS rules by rolling over a partial 401k distribution that contains after-tax contributions into a Roth IRA?

2) Why does the IRS rollover chart just say "pre-tax" for allowed rollovers from 401k's to Roth IRA?
First, any kind of Roth account can be rolled into any other Roth account. And any kind of pre-tax account can be rolled into any other pre-tax account.

(Take a minute and look at the IRS Rollover chart to confirm this is true.)

Then any kind of pre-tax account can be rolled over to a Roth account in what is called a Roth conversion and taxes will be due.

(Confirm this on the chart.)

The only thing that is disallowed is rolling Roth or After-tax funds into a pre-tax account. But why would anyone want to do that since taxes were already paid on that money?)

(Confirm this on the chart.)


Now, let’s look at your money.

There are 3 possible kinds of 401K contributions and an employer plan can allow one, two, or all three of these:
Tax-deferred contributions are pre-tax. Employer contributions are always in this category. All growth from these are also pre-tax.
Roth contributions are post-tax. All growth from these contributions are also post-tax. Some plans allow you to convert pre-tax contributions and growth to post-tax Roth.
After-tax contributions are post-tax too but the growth on them is pre-tax. Many plans that allow these also allow you to transfer out the After-tax contributions to Roth IRAs frequently to enable tax-free growth instead.

I think some others were like me in not knowing if you were referring to “after-tax contributions” or “After-tax contributions” where the first (lower-case) is an adjective referring to both the Roth and After-tax (second and third categories) or you were referring to After-tax (the last category only). This choice of terminology in the field of finances is unfortunate. This is possibly why it is not in the IRS chart—because it could be mis-read easily.

But everyone familiar with IRAs and 401Ks pretty intuitively know what the chart will say. I think it was created to avoid disagreement on the lesser-known types of rollovers.


I will also admit that I almost always hear of someone withdrawing from a 401K with 2 checks, one to be deposited in a Roth IRA, and one to be deposited in a Rollover (traditional) IRA. But you spoke upfront about requesting one check for both types of money. Between that and trying to understand your terminology, I started thinking the one check was due to not being able to do 2 INDIRECT distributions in the same year. (I thought your 401K administrator was sharp in preventing you from making a rollover error.) But now I see that I was wrong on the “INDIRECT” issue.

1) You can rollover either After-tax or after-tax to a Roth IRA. But the first will be partly a Roth conversion if there is any pre-tax money going in. If you are rolling over post-tax money, that part will be an untaxed rollover.

2) In my opinion, it would lead to lots of confusion if there was a row in the chart for “After-tax 401K” as I described.

The chart also has 401Ks split between two lines. The pre-tax parts are included in "Qualified plan (pre-tax)" and are taxed (footnote 3) while the post-tax parts are included in "Designated Roth Account" as a clean rollover (not taxed). Since the chart is flagging when the rollover (ie, Roth conversion) will be taxed, the Traditional 401K would be included in "Qualified plan (pre-tax)", the Roth 401K would be included in "Designated Roth Account", but how would the "After-tax 401K" (upper case) be shown in this chart when the contributions are rolled over tax-free but the growth is yet to be taxed? Is there any rationale for why it CAN'T be rolled over?

If you still don't feel comfortable putting the pre-tax part in the Roth IRA, then put it a Rollover (traditional) IRA instead. But, that will make the distribution be tax-free. Then if you convert it to Roth the next day or in a few months, you will have a Roth conversion that will be taxed this year, instead of last year.

(edited to add to chart rationale)
Last edited by celia on Wed Jan 12, 2022 12:57 pm, edited 2 times in total.
A dollar in Roth is worth more than a dollar in a taxable account. A dollar in taxable is worth more than a dollar in a tax-deferred account.
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retiredjg
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Re: 401k to Roth IRA indirect rollover conversion - urgent question

Post by retiredjg »

MrRE wrote: Tue Jan 11, 2022 9:42 pm
Yes, my 401k plan allowed "after-tax" money.


I totally agree that lots and lots of people move after-tax to a Roth IRA using a conduit IRA as a back-door.
Maybe you know somebody doing this, but that is not how people here do it (except by mistake). And it is not one of the procedures I've seen described in the Wiki or in numerous blogs about the subject.

I have discussed the mega-backdoor procedure with hundreds of people here. I can recall one (maybe two) who rolled their money to tIRA by mistake instead of into Roth IRA.

But remember, lots and lots also make mistakes doing those rollovers.
No, I'm sorry I don't remember that. The mega-backdoor procedure is usually pretty mistake free from what I've seen here.

The ordinary backdoor Roth process is prone to mistakes though.

Is it possible you don't understand that the backdoor Roth process and the mega-backdoor process are completely different things? That could explain both of your statements above.

And a backdoor Roth IRA via tIRA is different than a plan-to-Roth IRA rollover I'm doing.
Yes. The plan to Roth IRA rollover you want to do is known as the "mega-backdoor Roth".


My last concern is the after-tax part.

I've done a lot of searching and the IRS doesn't explicitly mention the after-tax partial distribution rollover I want to do.

https://www.irs.gov/retirement-plans/ro ... ment-plans

But they do say a lot of complicated things about after-tax contributions and how they should be handled in other places, especially n2014-54.


So I want to make sure I'm not breaking the rules regarding the after-tax part.
This page has been discussed a number of times here on the forum. It appears that it is just poorly written because what it seems to say is not what is allowed to happen.

What is actually required is this: if the after-tax money is distributed or rolled over or out, the pre-tax earnings in that after-tax account must also go with the after-tax money. That is what I'm assuming your pre-tax/after-tax distribution from your 401k is.

The reason for my concern is I know the IRS is very very fussy about after-tax money going to Roth IRAs.

I've read that many times on the web.

That's why they have rules like the ordering rule.
I have never seen an instance when the IRS is fussy about any kind of money going into a Roth IRA. There are ordering rules but they are about how money comes out of Roth IRA.


At this point, your plan has distributed some money to you. Some is pre-tax and some has already been taxed. I can only think of three things for you to do with it. Only one of these options accomplishes what you want to do.

1. Deposit the check in your bank account and do nothing further. The pre-tax portion will be taxable with your 2021 taxes.

2. Deposit the check in your bank account. Within 60 days, deposit an amount equal to the distribution (including the withholding) into a Roth IRA. This will be an indirect rollover to Roth IRA. The pre-tax portion will be taxable with your 2021 taxes.

3. Deposit the check in your bank account. Within 60 days, deposit an amount equal to the distribution (including the withholding) into a traditional IRA. This will be an indirect rollover to traditional IRA and will also place some basis (already taxed money) in your tIRA. No taxes will be due for 2021. If you then do a Roth conversion of part or all of your tIRA, pro-rating between the pre-tax and after-tax portions will occur and taxes will be due for the year you do the Roth conversion. Pro-rating will occur every time you withdraw or convert money from IRA until your IRA is empty.
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retiredjg
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Re: 401k to Roth IRA indirect rollover conversion - urgent question

Post by retiredjg »

Here is the Wiki page for "mega-backdoor Roth".

https://www.bogleheads.org/wiki/Mega-backdoor_Roth
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celia
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Re: 401k to Roth IRA indirect rollover conversion - urgent question

Post by celia »

retiredjg wrote: Wed Jan 12, 2022 8:35 am 3. Deposit the check in your bank account. Within 60 days, deposit an amount equal to the distribution (including the withholding) into a traditional IRA. This will be an indirect rollover to traditional IRA and will also place some basis (already taxed money) in your tIRA. No taxes will be due for 2021. If you then do a Roth conversion of part or all of your tIRA, pro-rating between the pre-tax and after-tax portions will occur and taxes will be due for the year you do the Roth conversion. Pro-rating will occur every time you withdraw or convert money from IRA until your IRA is empty.
Retiredjg, this is not allowed. The pre-tax part can go to the Rollover (traditional) IRA, but the post-tax part needs to go to a Roth IRA. See the Rollover chart (and the very end of my previous post which I just edited).

The only time you can have pre-tax money in a traditional IRA is if you make a non-deductible contribution. That will be tracked on Form 8606, but what you suggest here will not be tracked, since it is not allowed. This would be like intentionally rolling over money to another employer plan that contains some basis (post-tax money). Then you have a mess to clean up.
A dollar in Roth is worth more than a dollar in a taxable account. A dollar in taxable is worth more than a dollar in a tax-deferred account.
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MrRE
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Re: 401k to Roth IRA indirect rollover conversion - urgent question

Post by MrRE »

retiredjg wrote: Wed Jan 12, 2022 8:35 am
MrRE wrote: Tue Jan 11, 2022 9:42 pm
Yes, my 401k plan allowed "after-tax" money.


I totally agree that lots and lots of people move after-tax to a Roth IRA using a conduit IRA as a back-door.
Maybe you know somebody doing this, but that is not how people here do it (except by mistake). And it is not one of the procedures I've seen described in the Wiki or in numerous blogs about the subject.

I have discussed the mega-backdoor procedure with hundreds of people here. I can recall one (maybe two) who rolled their money to tIRA by mistake instead of into Roth IRA.

But remember, lots and lots also make mistakes doing those rollovers.
No, I'm sorry I don't remember that. The mega-backdoor procedure is usually pretty mistake free from what I've seen here.

The ordinary backdoor Roth process is prone to mistakes though.

Is it possible you don't understand that the backdoor Roth process and the mega-backdoor process are completely different things? That could explain both of your statements above.

And a backdoor Roth IRA via tIRA is different than a plan-to-Roth IRA rollover I'm doing.
Yes. The plan to Roth IRA rollover you want to do is known as the "mega-backdoor Roth".


My last concern is the after-tax part.

I've done a lot of searching and the IRS doesn't explicitly mention the after-tax partial distribution rollover I want to do.

https://www.irs.gov/retirement-plans/ro ... ment-plans

But they do say a lot of complicated things about after-tax contributions and how they should be handled in other places, especially n2014-54.


So I want to make sure I'm not breaking the rules regarding the after-tax part.
This page has been discussed a number of times here on the forum. It appears that it is just poorly written because what it seems to say is not what is allowed to happen.

What is actually required is this: if the after-tax money is distributed or rolled over or out, the pre-tax earnings in that after-tax account must also go with the after-tax money. That is what I'm assuming your pre-tax/after-tax distribution from your 401k is.

The reason for my concern is I know the IRS is very very fussy about after-tax money going to Roth IRAs.

I've read that many times on the web.

That's why they have rules like the ordering rule.
I have never seen an instance when the IRS is fussy about any kind of money going into a Roth IRA. There are ordering rules but they are about how money comes out of Roth IRA.


At this point, your plan has distributed some money to you. Some is pre-tax and some has already been taxed. I can only think of three things for you to do with it. Only one of these options accomplishes what you want to do.

1. Deposit the check in your bank account and do nothing further. The pre-tax portion will be taxable with your 2021 taxes.

2. Deposit the check in your bank account. Within 60 days, deposit an amount equal to the distribution (including the withholding) into a Roth IRA. This will be an indirect rollover to Roth IRA. The pre-tax portion will be taxable with your 2021 taxes.

3. Deposit the check in your bank account. Within 60 days, deposit an amount equal to the distribution (including the withholding) into a traditional IRA. This will be an indirect rollover to traditional IRA and will also place some basis (already taxed money) in your tIRA. No taxes will be due for 2021. If you then do a Roth conversion of part or all of your tIRA, pro-rating between the pre-tax and after-tax portions will occur and taxes will be due for the year you do the Roth conversion. Pro-rating will occur every time you withdraw or convert money from IRA until your IRA is empty.
Thank you so much retiredjg :happy

I greatly appreciate your kind, thorough explanations, and your patience.

You can tell I'm struggling to communicate clearly sometimes, especially when things go off-topic for me, like mega backdoor.


So I especially appreciate that you pointed out options 1, 2, 3 above so clearly.


Yes, I want to do option 2, and always have from the start.

Thanks to this forum, it seems I am not breaking any rules per the forum replies, for which I am very grateful.


My credit union seemed to want me to do something similar to your option 3 because that's what they are accustomed to doing.

I didn't let them try do drag me down that path so I can't say exactly what they had in mind. They seemed confused and were waffling.

But in the end, I think I convinced them to allow me to do option 2.


Now I just have to finalize my decision to do option 2 within the 60 day limit.
Then send my credit union the signed authorization form.
Then my credit union's IRA department will review it, and do it,
or they will get back to me if any concerns.

Thanks again very much! :happy
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retiredjg
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Re: 401k to Roth IRA indirect rollover conversion - urgent question

Post by retiredjg »

MrRE wrote: Wed Jan 12, 2022 4:50 pm Thank you so much retiredjg :happy

I greatly appreciate your kind, thorough explanations, and your patience.

You can tell I'm struggling to communicate clearly sometimes, especially when things go off-topic for me, like mega backdoor.
You may think mega backdoor is off-topic...but what you are doing ACTUALLY IS the mega-backdoor.

It is important that you understand that because this is one of the things that might be stopped in the future, depending on legislation being considered. In other words be sure to ask about that before doing this again.

The mega-backdoor is usually done by a direct rollover but an in-direct rollover will work as well
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retiredjg
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Re: 401k to Roth IRA indirect rollover conversion - urgent question

Post by retiredjg »

celia wrote: Wed Jan 12, 2022 1:14 pm
retiredjg wrote: Wed Jan 12, 2022 8:35 am 3. Deposit the check in your bank account. Within 60 days, deposit an amount equal to the distribution (including the withholding) into a traditional IRA. This will be an indirect rollover to traditional IRA and will also place some basis (already taxed money) in your tIRA. No taxes will be due for 2021. If you then do a Roth conversion of part or all of your tIRA, pro-rating between the pre-tax and after-tax portions will occur and taxes will be due for the year you do the Roth conversion. Pro-rating will occur every time you withdraw or convert money from IRA until your IRA is empty.
Retiredjg, this is not allowed. The pre-tax part can go to the Rollover (traditional) IRA, but the post-tax part needs to go to a Roth IRA. See the Rollover chart (and the very end of my previous post which I just edited).
I agree it is not the best way to do it. In fact I think it is the wrong way to do it, but I believe it is allowed.

The only time you can have pre-tax money in a traditional IRA is if you make a non-deductible contribution.
I wish this were true, but I don't believe it is. If you look at the instructions for Line 2 in the instructions for Form 8606, I think you will see it is entirely possible to roll after-tax money from a 401k into a traditional IRA.

https://www.irs.gov/pub/irs-pdf/i8606.pdf

  • Line 2
    Generally, if this is the first year you are required to file Form 8606, enter -0-. Otherwise, use the Total Basis Chart to find the amount to enter on line 2.

    However, you may need to enter an amount that is more than -0- (even if this is the first year you are required to file Form 8606) or increase or decrease the amount from the chart if your basis changed because of any of the following.
    • • You had a return of excess traditional IRA contributions (see Return of Excess Traditional IRA Contributions, earlier).

      • Incident to divorce, you transferred or received part or all of a traditional, SEP, or SIMPLE IRA (see the last bulleted item under Line 7, later).

      • You rolled over any nontaxable portion of your qualified retirement plan to a traditional, SEP, or SIMPLE IRA that wasn’t previously reported on Form 8606, line 2. Include the nontaxable portion on line 2.
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