Extra $32,500 in Roth IRA - too good to be true?

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gvernon
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Extra $32,500 in Roth IRA - too good to be true?

Post by gvernon » Thu Jan 06, 2011 9:25 pm

So after reading this thread:

http://www.bogleheads.org/forum/viewtopic.php?t=65836

And then following it up with my 401k provider via phone call, it seems as if I can use the after-tax option in my 401k plan to contribute an extra $32,500 into a Roth IRA this year (and every year).

The process goes like this:

1. Max out pre-tax (or Roth) 401k - $16,500
2. Contribute on an after-tax basis (my company plan allows up to 80% of salary to be contributed after-tax) up to the IRS combined limit of $49,000
3. Request an in-service withdrawal of after-tax funds - $32,500, rollover to a Roth IRA, and then pay taxes on any earnings as ordinary income
Bonus - Rollovers have no effect on the regular $5000 Roth IRA contribution limit, so I can do that too!

Am I missing anything? This seems too good to be true?

This method would also enable one to "convert" the money in a taxable investing account into a Roth IRA in a matter of months by contributing the max allowable to after-tax 401k while living off of the money from the taxable account (knowing that there may be some capital gains, but this seems like a small price to pay). Using the money in the taxable account as a replacement paycheck would help to max out the after-tax 401k ASAP, and therefore reduce the time the amount could grow and create earnings which would be taxed at ordinary income.

Thoughts?

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rustymutt
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Post by rustymutt » Thu Jan 06, 2011 9:40 pm

Yes, your missing something. Now I can't tell you what it is, but I put same after tax into my roth after I retired. I don't believe you an do this every year.
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Cloud
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Post by Cloud » Thu Jan 06, 2011 9:58 pm

You're not missing anything. That's exactly what I proposed in the other thread. Just remember you can't have any other IRA's or conversions will be taxed by the percentage of pretax money in all IRAs, the pro-rata rule.

Also, remember the 49K limit includes employer match if any.

I just signed up for an additional after tax at work but for some reason they limit the after tax stuff to 10% of pay. An unfortunate quirk about my plan so I won't be able to hit the 49K limit but every bit helps.

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gvernon
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Post by gvernon » Thu Jan 06, 2011 10:03 pm

Cloud wrote:Just remember you can't have any other IRA's or conversions will be taxed by the percentage of pretax money in all IRAs, the pro-rata rule.
I have an existing Roth IRA but no traditional IRA, so I should be good right?

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Cloud
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Post by Cloud » Thu Jan 06, 2011 10:13 pm

Yes, ROTHs are OK.. You're basically performing the method described in this link below but taking it one step further to get around the 5K per year limit since rollovers don't have limits.

http://thefinancebuff.com/the-backdoor- ... ow-to.html

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Re: Extra $32,500 in Roth IRA - too good to be true?

Post by ThePrune » Thu Jan 06, 2011 10:18 pm

gvernon wrote:Am I missing anything? This seems too good to be true?

Thoughts?
I'm in the process of getting an IRS opinion on this strategy. They promise a response within 15 days.

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gvernon
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Post by gvernon » Thu Jan 06, 2011 10:28 pm

Thanks Cloud.

This is truly a "eureka" moment for me, as I might never have to deal with taxable investing. This backdoor will allow us to do all of our investing in tax sheltered accounts (unless we were to get huge raises). If husband and wife were both eligible for this, that would be 108k/year of tax sheltered investments between 401k and IRA!!!

I'm confused as to why people aren't as excited about this as I am - maybe it's lack of knowledge or maybe I am one of the lucky ones with a cooperative 401k plan?

In any case, I'm grateful for the all Boglehead help and advice.

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Opponent Process
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Post by Opponent Process » Thu Jan 06, 2011 10:31 pm

ethical?
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Post by HornedToad » Thu Jan 06, 2011 10:32 pm

gvernon wrote:Thanks Cloud.

I'm confused as to why people aren't as excited about this as I am - maybe it's lack of knowledge or maybe I am one of the lucky ones with a cooperative 401k plan?

In any case, I'm grateful for the all Boglehead help and advice.
In-service withdrawls from 401k plans are pretty rare I think.
Additionally, if two spouses are working then that's already $33k+potential +$10k more tax-deferred savings if eligible for Roth IRA before this strategy is needed. That's pretty substantial already.

For people who exhaust tax-deferred options, and whose company allows in-service withdrawls and aftertax contributions to 401k, then this is a great alternative.

(Also, per TFB's post on this, you can't have an existing IRA account with tax-deferred money and many people prefer to roll 401k to IRA when they switch jobs).

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Post by gvernon » Thu Jan 06, 2011 10:39 pm

Opponent Process wrote:ethical?
If it's not illegal, then I don't really see how it's any different than using the non-deductible IRA to Roth IRA backdoor? I'm open to other opinions though...

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gvernon
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Post by gvernon » Thu Jan 06, 2011 10:44 pm

HornedToad wrote:Additionally, if two spouses are working then that's already $33k+potential +$10k more tax-deferred savings if eligible for Roth IRA before this strategy is needed. That's pretty substantial already.
True. I imagine we might be somewhat rare in this regard, but we have done the above 3 years in a row now (DINK's making right under the Roth limit).

Also, as I mentioned in the OP, this can be used as a vehicle to "convert" any existing taxable investments / cash / inheritance, so it's not necessarily dependent on a large income.

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baa_10
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Post by baa_10 » Thu Jan 06, 2011 10:58 pm

Gvernon,

Giddy here as well, but just waiting on some research that The Prune has graciously offered to do with the IRS. I have verified that my 401k plan allows in-service withdrawals (rollovers) of after-tax contributions and earnings.

But as Cloud has noted, the $49k annual limit includes any company match contributions.
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Post by DH287 » Thu Jan 06, 2011 11:08 pm

You are fortunate to be allowed to contribute above 16,500/21,500 to your 401(k). Very few plans I've seen allow that.

There is no shortage of debate on this, but, given how many unknowns there are in the future tax-code, being able to contribute and defer more $$$ than your company provides matching for (if relevant) may or may not prove to matter in the long run.

kd2008
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Post by kd2008 » Thu Jan 06, 2011 11:13 pm

take a look at this: http://online.wsj.com/article/SB125573502903090977.html

and this thread: http://www.bogleheads.org/forum/viewtopic.php?p=633585

i hope these help.

this from fairmark is considered most comprehensive: http://www.fairmark.com/rothira/09030801-401k-basis.htm
Last edited by kd2008 on Thu Jan 06, 2011 11:17 pm, edited 1 time in total.

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Post by SpecialK22 » Thu Jan 06, 2011 11:16 pm

The way I, and my 401(k) provider and Vanguard, understand the tax rules is that this is perfectly legal for my situation. I only have a Roth IRA and Vanguard accepts distributions of after-tax money from employer qualified accounts into a Roth IRA. Two limiting factors that are readily apparent to me as to why more people don't do this:

1.) Not many plans offer inservice distribution with no suspension (as was already mentioned).

2.) Many plans limit the amount of money that can be contributed. For example, my employer limits my contributions to 25% of pay.

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Post by SpecialK22 » Thu Jan 06, 2011 11:20 pm

DH287 wrote:

There is no shortage of debate on this, but, given how many unknowns there are in the future tax-code, being able to contribute and defer more $$$ than your company provides matching for (if relevant) may or may not prove to matter in the long run.
I think it absolutely does matter. Regardless of most all future tax rules, Roth money will trump after-tax money.

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Post by edge » Thu Jan 06, 2011 11:21 pm

Opponent Process wrote:ethical?
Um, gaming an overly complex and utterly screwed up tax code has 'ethical' problems?

I think of it as encouraging policy makers to fix our awful tax code.

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Post by kd2008 » Thu Jan 06, 2011 11:22 pm

Quoting from the fairmark article:

Strategy 1: direct conversion of after-tax dollars
The first strategy is the simplest: instruct the employer to make a direct transfer of the after-tax dollars from the 401k to a Roth IRA, while leaving the pre-tax dollars in the 401k account. Initially some experts believed this was possible, but further study of the situation revealed that this belief was mistaken. It was based on language in section 402(c)(2) of the Internal Revenue Code saying "the amount transferred shall be treated as consisting first" of the pre-tax dollars. Careful reading of that section makes it clear that this language referred to the pre-tax dollars in that particular distribution, not the pre-tax dollars in the overall account. When your 401k account includes pre-tax and after-tax money, each distribution includes pre-tax and after-tax money, even if you would like to distribute (and convert) only the after-tax money. The IRS addressed the issue informally in its Fall 2008 Retirement News for Employers newsletter (http://www.irs.gov/pub/irs-tege/rne_fall08.pdf), which says:

"You may not take a distribution of only your after-tax contributions. Any distribution from a retirement plan account in which there is basis is treated as consisting of both pre-tax amounts (your employer's pre-tax contributions and earnings) and your after-tax contributions. The after-tax contribution portion of each distribution is tax-free, but the rest must be included in your gross income. "

The newsletter goes on to provide the formula for determining the fraction of the distribution that is after-tax, and then says, "If you roll over the distribution to a Roth IRA (assuming you meet the income limits and filing status for making rollovers to Roth IRAs), the pre-tax portion (employer contributions and earnings) must still be included in your gross income. . . . These same rules apply if you make a direct rollover to the Roth IRA."

This simple strategy was at one time endorsed by a prominent tax practitioner but I believe it is now agreed by all experts who have studied the question that the approach does not work. If you tell your employer to pay out only the after-tax portion of your 401k and transfer it directly to a Roth IRA, the transfer will be only partly nontaxable.

For example, if your 401k has a total value of $25,000 of which $5,000 represents after-tax dollars, a transfer of $5,000 to a Roth IRA would be 80% taxable, because 80% of the 401k account consisted of pre-tax dollars. You would report $4,000 of income on this conversion, and you would still have $4,000 of after-tax money in your 401k account.

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Post by Bfwolf » Thu Jan 06, 2011 11:55 pm

This link seems to go into great detail about this idea. From what I can gather, you are proposing Strategy #1, which it says the IRS does not allow. I must admit I could not follow all the strategies--I'm blaming the late hour. :wink:

http://fairmark.com/rothira/09030801-401k-basis.htm

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Post by Bfwolf » Thu Jan 06, 2011 11:57 pm

kd2008 beat me to it.

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SpecialK22
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Post by SpecialK22 » Fri Jan 07, 2011 12:10 am

The fairmark article seems to argue IRS rules surrounding post separation distributions/rollovers of 401(k) contributions, while the debate in this thread centers around in-service distributions. In other words, much of what is in the fairmark article does not apply to the debate at hand.

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market timer
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Post by market timer » Fri Jan 07, 2011 12:14 am

So is my 401(K) administrator wrong to allow me to do an in-service withdrawal of after-tax 401(K) contributions? They don't allow in-service withdrawals of pre-tax contributions.

This is too confusing.

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Post by SpecialK22 » Fri Jan 07, 2011 12:21 am

Market timer, I think the problem is that people are bringing up tax rules which do not apply to the debate at hand. For example, my 401(K) seems to have the requirement to segregate different contributions within the same 401(k) account (i.e. after-tax from pre-tax); however, these are not in separate accounts in and of themselves. The Prunes' argument seems to focus around contributions added to a separate account. Likewise, the fairmark article seems to focus on making distributions/rollovers from a 401(k) post employment; we are talking about in-service distributions within this thread.

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Post by cliffedelgado » Fri Jan 07, 2011 1:33 am

My 401k plan also only let me do an in-service withdrawal of after-tax + associated earnings. I rolled it all into a Roth IRA and will pay taxes on the earnings part. Some have suggested a way to avoid paying the taxes by rolling the earnings into a trad IRA and then back into the 401k, but that was way too complicated for me.

Will see how 2010 taxes are and report back then.

I believe the fairmark article strategy 1 is doable for in-service, but not for post employment.

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Post by xerty24 » Fri Jan 07, 2011 1:53 am

market timer wrote:So is my 401(K) administrator wrong to allow me to do an in-service withdrawal of after-tax 401(K) contributions? They don't allow in-service withdrawals of pre-tax contributions.

This is too confusing.
Yes it's confusing, but that's the law. You can't get in-service withdrawals of pre-tax contributions. Pretax match or after-tax contributions are ok, plan rules permitting.

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Post by letsgobobby » Fri Jan 07, 2011 2:09 am

DH287 wrote:You are fortunate to be allowed to contribute above 16,500/21,500 to your 401(k). Very few plans I've seen allow that.
exactly, AND my company doesn't allow in-service rollovers or withdrawals. Therefore, hard to excited about this backdoor backdoor Roth, since I'm not eligible to participate and I suspect the same is true for many others.

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Post by Default User BR » Fri Jan 07, 2011 3:39 am

market timer wrote:So is my 401(K) administrator wrong to allow me to do an in-service withdrawal of after-tax 401(K) contributions? They don't allow in-service withdrawals of pre-tax contributions.
In the absence of a qualifying event, it would be illegal for them to do so.

Other contributions, including employeee after-tax and employer matching, are available for in-service distribution.


Brian

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Post by Default User BR » Fri Jan 07, 2011 3:46 am

cliffedelgado wrote:My 401k plan also only let me do an in-service withdrawal of after-tax + associated earnings. I rolled it all into a Roth IRA and will pay taxes on the earnings part. Some have suggested a way to avoid paying the taxes by rolling the earnings into a trad IRA and then back into the 401k, but that was way too complicated for me.
It's not really that complicated. The key there is a special rule that only permits taxable money to be rolled from an IRA into a qualified plan. It's an explicit exception to the pro-rata rule.

So you roll into a TIRA, then roll back the taxable portion. Then do a conversion of the remainder. Some suggest doing it the other way around. Form 8606 just asks for the value of IRAs at the end of the year.

For what it's worth, I discussed this with the IRS and the rep said it was ok. I added the qualifier because information you get from the help line is not binding. If they give you erroneous information, too bad (for you).



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Post by Bfwolf » Fri Jan 07, 2011 9:33 am

From the Fairmark article:

"This discussion applies to you only if you are able to take an eligible rollover distribution, which means either you have a 401k account at a place where you are no longer employed or you participate in a 401k plan that allows in-service distributions — in other words, distributions to people who are still employed at that company."

Seems to me they have explicitly called out that their guidance (that you CAN'T do the after-tax only rollover) applies to those receiving in-service distributions. I must admit that this does not seem logical to me since the law only permits distribution of the after-tax portion, so how can it be accounted for as a mixture of after-tax and pre-tax dollars? Then again, nobody said tax code had to be logical.

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Post by Cloud » Fri Jan 07, 2011 12:11 pm

Bfwolf wrote:From the Fairmark article:

"This discussion applies to you only if you are able to take an eligible rollover distribution, which means either you have a 401k account at a place where you are no longer employed or you participate in a 401k plan that allows in-service distributions — in other words, distributions to people who are still employed at that company."

Seems to me they have explicitly called out that their guidance (that you CAN'T do the after-tax only rollover) applies to those receiving in-service distributions. I must admit that this does not seem logical to me since the law only permits distribution of the after-tax portion, so how can it be accounted for as a mixture of after-tax and pre-tax dollars? Then again, nobody said tax code had to be logical.
Going forward for people just starting to take advantage of this (assuming you don't already have years worth of untaxed contributions), the taxed and non taxed portions are not an issue. If you in-service and roll/convert yearly there won't be enough taxable gains to worry about. Just pay the minuscule taxes and move on.

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Post by Default User BR » Fri Jan 07, 2011 12:34 pm

Bfwolf wrote:Seems to me they have explicitly called out that their guidance (that you CAN'T do the after-tax only rollover) applies to those receiving in-service distributions. I must admit that this does not seem logical to me since the law only permits distribution of the after-tax portion, so how can it be accounted for as a mixture of after-tax and pre-tax dollars? Then again, nobody said tax code had to be logical.
All I can say is that I work for a very large company. The 401(k) is run by ING, another very large company. There are teams of lawyers and accountants involved between the two. The likelihood that the plan would allow something blatantly illegal isn't good.

When I took distribution of my after-tax contributions, it was in the form of a direct rollover. I received a check made out to the receiving institution, FBO me. Along with it came a statement showing the exact breakdown of taxable and non-taxable funds (remember that a share of earnings comes along).




Brian

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Post by Bfwolf » Fri Jan 07, 2011 12:47 pm

Brian,

I cannot argue with anything you're saying.

The Fairmark article still gives me pause, even though it really seems illogical to me.

I would love to be able to take advantage of this. My company allows 10% of salary after-tax contribution (above and beyond the 15% of salary pre-tax) to my 401k and in-service withdrawals of after-tax money.

I just wish there was some way to end the debate once and for all.

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Post by cliffedelgado » Fri Jan 07, 2011 1:22 pm

Default User BR wrote: It's not really that complicated. The key there is a special rule that only permits taxable money to be rolled from an IRA into a qualified plan. It's an explicit exception to the pro-rata rule.

So you roll into a TIRA, then roll back the taxable portion. Then do a conversion of the remainder. Some suggest doing it the other way around. Form 8606 just asks for the value of IRAs at the end of the year.
I agree it's doable, but not worth the hassle for me (and I'm lazy). Rolling the taxable portion back into the qualified plan would require another form to fill out. But it's good you brought it up and reminded everyone of the possibility. Maybe I'll try the "double step" this year if I have extra time :)

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SpecialK22
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Post by SpecialK22 » Fri Jan 07, 2011 2:42 pm

Bfwolf wrote:From the Fairmark article:

"This discussion applies to you only if you are able to take an eligible rollover distribution, which means either you have a 401k account at a place where you are no longer employed or you participate in a 401k plan that allows in-service distributions — in other words, distributions to people who are still employed at that company."

Seems to me they have explicitly called out that their guidance (that you CAN'T do the after-tax only rollover) applies to those receiving in-service distributions. I must admit that this does not seem logical to me since the law only permits distribution of the after-tax portion, so how can it be accounted for as a mixture of after-tax and pre-tax dollars? Then again, nobody said tax code had to be logical.
Wow, I completely missed that portion when I made my comment above. For some reason I thought kd2008's post (never thought to click on the previous link) was the entire article last night; I must have been really tired. I now have the same question as you, Bfwolf, since I now have contradictory information.

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Post by Carl53 » Fri Jan 07, 2011 7:14 pm

I had some after tax contributions in my former employer's 401k. While still employed, I made inservice withdrawals of the after tax contributions to avoid later hassles of tracking taxable and non-taxable portions. I had to also take the taxable earnings that were attributable to the after tax earnings. I was able to do a direct transfer of the earnings to my VG TIRA. This I did twice early in the past decade. I did not consider moving the after tax to my Roth, but may have been fortunate to not do so considering some other comments in this thread.

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Post by Bfwolf » Tue Jan 11, 2011 9:25 pm

Good news!

I made a post on the Fairmark Forum asking for guidance on our question here. A poster named Alan S who seems to be very knowledgable on the subject based on his other posts confirmed that if our 401k plans will do in-service withdrawals of after-tax money only, then the pro-rata rules do not apply. Hooray! Of course, came with usual cautions about checking with your plan administrator.

Here's the link:

http://fairmark.com/forum/read.php?2,56002

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Post by baa_10 » Tue Jan 11, 2011 11:51 pm

Bfwolf,

Thanks for the continued research. Conversations with my 401k plan administrator are in agreement with what you have summarized. I am doing a little more research (my tax advisor) on the topic, but then plan to begin to contribute after-tax contributions to my 401k plan.... with the intent to withdraw once the maximum after-tax contribution limit is reached and complete a in-service withdrawal/rollover into my Roth IRA.

Not quite ready to pull the trigger yet, but getting close. Will be nice to gain some more tax-advantaged space.

Regards,
Simplicity is the ultimate sophistication. ~Leonardo DaVinci

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Post by Bfwolf » Tue Jan 11, 2011 11:56 pm

baa_10,

I think most 401ks will automatically put the money pre-tax first, and then post-tax if you have elected to continue to contribute once you're reached your pre-tax limit. In addition, most 401ks do the company match on a per paycheck basis.

So in practice, if your 401k falls into both those camps, and you want to ensure you get the full company match, you would plan your contributions so that you'll reach your after-tax contribution limit on your very last paycheck of the year.

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Post by neurosphere » Wed Jan 12, 2011 10:27 am

Gosh, yet again I am confused about one particular question regarding the after tax 401k --> ROTH IRA and existing pretax IRAs.

I was under the impression that it doesn't matter if you have a pretax IRA or rollover IRA if you are doing an inservice after-tax withdrawal with conversion to IRA. That you do not have to prorate your existing pretax IRA money.

But that if you want to make a non-deductible IRA contribution and then convert to the roth, then you must prorate with your existing pre-tax IRAs.

Are in-service after tax withdrawals and subsequent conversion to ROTHs in ANY way different from non-deductible IRA conversion to ROTH IRA with respect to existing deductible IRA or pre-tax rollover IRA?

I get confused with every new thread. :cry:

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Post by Bfwolf » Wed Jan 12, 2011 10:51 am

neurosphere wrote:Gosh, yet again I am confused about one particular question regarding the after tax 401k --> ROTH IRA and existing pretax IRAs.

I was under the impression that it doesn't matter if you have a pretax IRA or rollover IRA if you are doing an inservice after-tax withdrawal with conversion to IRA. That you do not have to prorate your existing pretax IRA money.

But that if you want to make a non-deductible IRA contribution and then convert to the roth, then you must prorate with your existing pre-tax IRAs.

Are in-service after tax withdrawals and subsequent conversion to ROTHs in ANY way different from non-deductible IRA conversion to ROTH IRA with respect to existing deductible IRA or pre-tax rollover IRA?

I get confused with every new thread. :cry:
Neurosphere, your understanding is correct. If you do an in-service direct rollover from an after-tax 401k to a Roth, your tIRA accounts are immaterial, since none of the rollover money ever touches a tIRA account. This is different from making a non-deductible contribution to a tIRA and then converting to a Roth--in that situation your conversion will be pro-rated between pre-tax and after-tax $s in your tIRA.

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Post by marco100 » Wed Jan 12, 2011 11:36 am

If anyone is actually thinking of doing this with this amount of money, it would be wise to actually consult with a qualified tax advisor, such as a CPA, and get a written opinion documenting the legality/non-taxability of the transaction is advisable.

It would be nice to have a private letter ruling from the IRS, too.

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Post by marco100 » Wed Jan 12, 2011 12:07 pm


marco100
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I Suggest This is NOT Doable....

Post by marco100 » Wed Jan 12, 2011 12:14 pm

OK, if you look at the IRS link I posted, down the page a little ways, you find this bit of info:


Is there a limit on how much an employee may contribute to his or her designated Roth account?

Yes, the combined amount contributed to all designated Roth accounts and traditional, pre-tax accounts in any one year for any individual is limited (under Code §402(g)). The limit is $16,500 in 2010 and 2011 plus an additional $5,500 in catch-up contributions in 2010 and 2011 if the employee is age 50 or older at the end of the year. These limits may be increased in later year to reflect cost-of-living adjustments.


"Designated Roth account" is the terminology used to distinguish pre-tax 401(k) contributions from Roth 401(k) contributions. It looks like the max total if you are under 50 is the 16,500. Of the 16,500, you can designate how much is Roth and how much is pretax. If you are 50 or over you get the catchup 5500, total: 22,000.

The transaction or workaround being suggested in this thread would probably be construed as a method to circumvent the limit and might result in disallowance of the transaction, taxes, penalties, etc.


It also says this:


Can an individual make the maximum contributions, including catch-up contributions, to both a designated Roth 401(k) or 403(b) account and a Roth IRA in the same year?

Yes. An individual age 50 or older can make a contribution of up to $22,000 in 2010 and 2011 to the 401(k) or 403(b) plan ($16,500 regular and $5,500 catch-up contributions) and $6,000 to a Roth IRA ($5,000 regular and $1,000 catch-up IRA contributions) for a total of $28,000 for 2010 and 2011.


OK, so it looks like the total is 28,000 if you're 50 or older.

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Post by marco100 » Wed Jan 12, 2011 12:37 pm

More IRS stuff:


2010 In-Plan Rollovers

1.
What is a 2010 in-plan Roth rollover?
2.
How is a 2010 in-plan Roth rollover taxed?
3.
How does my plan report my 2010 in-plan Roth rollover?
4.
How do I report my 2010 in-plan Roth rollover on my 2010 taxes?
5.
How does my plan determine the amount of a distribution allocable to my in-plan Roth rollover?
6.
How does my plan report a 2010 distribution from my in-plan Roth rollover?
7.
How am I taxed if I receive a distribution in 2010 or 2011 of any amount of my 2010 in-plan Roth rollover?
8.
How do I report a 2010 distribution from the amount rolled over as my in-plan Roth rollover?

What is a 2010 in-plan Roth rollover?

A 2010 in-plan Roth rollover is an eligible rollover distribution from your non-Roth account, made from September 28, 2010, to December 31, 2010, and rolled over to your designated Roth account in the same plan. You can roll over your non-Roth account ERD either as an in-plan Roth direct rollover or as a in-plan Roth 60-day rollover. Your plan must have a designated Roth account in place at the time you do an in-plan Roth rollover.


How is a 2010 in-plan Roth rollover taxed?

You generally include the taxable amount (fair market value minus your basis in the distribution) of an in-plan Roth rollover in gross income for the tax year in which you receive the distribution. However, for in-plan Roth rollovers done in 2010, you:

*
include half of the taxable amount in gross income for 2011 and the other half in 2012, or

*
elect to include the entire taxable amount in gross income in 2010.

If you elect to include the taxable amount in gross income in 2010, this election applies to all of your in-plan Roth rollovers in 2010 and you may not revoke the election after the due date (including extensions) of your 2010 tax return.

An in-plan Roth direct rollover is not subject to the mandatory 20% withholding. You may have to increase your federal income tax withholding or make estimated tax payments to avoid an underpayment of tax penalty.

In-plan Roth rollovers are not subject to the 10% additional tax on early distributions. However, they are subject to a special recapture rule when a plan distributes any part of an in-plan Roth rollover within a 5-taxable-year period.


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This might also be helpful to look at:



http://www.irs.gov/pub/irs-drop/n-10-84.pdf

marco100
Posts: 763
Joined: Thu Mar 01, 2007 7:09 pm

Post by marco100 » Wed Jan 12, 2011 12:51 pm

OK, if you take a look at the pdf IRS file in my prior post in this thread, specifically question & answer 2, what it seems to be saying is that:

You can do a rollover from a 401(k) to a Roth but only "in plan", i.e., your employer's 401(k) must have a plan Roth 401(k) as part of the employer's plan.

Actually looking closely at Q &A2, it looks like you CANNOT do what you are planning, even "in plan", unless an eligible event (e.g. separation) has occurred.


IOW, it seems as if the IRS anticipated the apparent loophole or workaround you are trying to exploit.

In your first post in this thread, it sounds like you're planning on actually taking a distribution from your 401(k), and rolling it into some other Roth that is not an "in plan" Roth. That sounds like it might be a no-no.

Proceed with extreme caution.


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SpecialK22
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Post by SpecialK22 » Wed Jan 12, 2011 1:03 pm

Bfwolf, thanks for that additional reassurance. What Alan S seems to be claiming is in virtual lockstep with what my 401(k) provider is stating. The other question I have concerns this after-tax portion put into a Roth IRA: Does this money count towards my annual contribution Roth IRA limit? If I understand all that the Vanguard rep had told me, this money is viewed essentially the same way as any other rollover. So, it has no effect on my yearly contribution limits to my Roth IRA.

Marco100, I think you are talking about something different. Your posts seem to be talking about an in-plan rollover to a Roth within the same 401(k) plan. What most of us are wondering is twofold:

1.) Can we take an in-service distributions of only after-tax contributions + the gains on these same contributions, or does it need to be pro-rata?

2.) Is this after-tax distribution able to be rolled over to a Roth IRA without affecting the annual contribution limit?

Bfwolf
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Joined: Thu Oct 14, 2010 11:19 am

Post by Bfwolf » Wed Jan 12, 2011 4:58 pm

Agreed SpecialK, this is a rollover and as such has no impact on your ability to contribute to an IRA normally.

Default User BR
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Joined: Mon Dec 17, 2007 7:32 pm

Post by Default User BR » Wed Jan 12, 2011 7:02 pm

marco100 wrote:IOW, it seems as if the IRS anticipated the apparent loophole or workaround you are trying to exploit.

In your first post in this thread, it sounds like you're planning on actually taking a distribution from your 401(k), and rolling it into some other Roth that is not an "in plan" Roth. That sounds like it might be a no-no.
You are mixing different things.


Brian

quarterstock
Posts: 37
Joined: Sun May 31, 2009 6:37 am

Post by quarterstock » Thu Jan 13, 2011 12:10 am

Gvernon, Your plan sounds fine. I'm pleased that this strategy is a revelation to you, since I was the one who brought it up in the previous thread. It was a eureka moment for me too when I pieced it together on my own and subsequently "re-discovered" it at the Fairmark forums after extensive googling.

For what it's worth, after all that googling, the two individuals whose opinion I respect the most on the issue are Alan S at the fairmark forums and a fellow named LH2004 on the fatwallet personal finance forums. I'd encourage you to read everything you can from those two individual's on this subject; they really seem to know their stuff.

The strategy isn't too good to be true. It's just extremely limited in it's applicability. Few people have the means, desire, and plan administrator rules to take advantage of this technique. You should count yourself fortunate.

As another data point, I spoke with my 401k administrator's rollover department (Fidelity) last week. Just like last year, I clearly explained that I was requesting an in-service distribution of my after-tax contributions and their associated earnings with the intent to roll them directly over to my Roth IRA at a third-party custodian. The Fidelity rep understood the request perfectly and didn't bat an eye. The day after the transaction took place, I confirmed that my 401k account no longer contained after-tax funds.

I do look forward to hearing back from ThePrune on the issue since he's contacted the IRS directly for a verdict. But given the number of "name-brand" institutions that process these requests routinely, I have a hard time seeing how it runs afoul of any IRS regs. I'm certainly willing to make these "grey-zone transactions" even with the perceived risks. The upside is just too great. And I genuinely believe that the strategy is perfectly acceptable in the eyes of the IRS.

bdpb
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Joined: Wed Jun 06, 2007 3:14 pm

Post by bdpb » Thu Jan 13, 2011 8:09 am

quarterstock wrote: As another data point, I spoke with my 401k administrator's rollover department (Fidelity) last week. Just like last year, I clearly explained that I was requesting an in-service distribution of my after-tax contributions and their associated earnings with the intent to roll them directly over to my Roth IRA at a third-party custodian. The Fidelity rep understood the request perfectly and didn't bat an eye. The day after the transaction took place, I confirmed that my 401k account no longer contained after-tax funds.
I'd like to hear exactly how you completed this transaction. I'm in an
identical situation and Fidelity is telling me that the after-tax contributions
can go directly to a Roth and that the earnings can go directly to an IRA with
no taxes due. I'm still not sure that this is possible based on previous
discussions but two Fidelity reps have already said the same thing.

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