401K Rollover to Roth in 2008

[crazy connie]

OK for my Tax Pro Buddies here! In 2008 I can roll my 401K directly into a Roth and pay tax as required. The question I am looking for a response to is: Will I have to pay tax on the accumulated earnings attributed to after tax funds? I am not finding the info on Ed Slotts or Fairmark Boards. Has anyone here looked into this yet? The info below is what I have to work with. Paying Uncle Sam on contributions of $89,671.63 & the Company Match of $25,219, while not my favorite thing to do would set up a nice healthy Roth. I do know that per the IRS this can be split into TIRA & ROTH but bet the former employer will only want to cut funds check one way.

Thanks for the guidance you may have!

Source Source Balance Vested Balance


Before Tax Account $89,671.63 $89,671.63

After Tax Account $248,143.92 $248,143.92

XXXX Company Match Account $25,219.20 $25,219.20

Prior Co Contributions Account $11,076.33 $11,076.33


Total: $374,111.08 $374,111.08

Connie

P.S. Yes I know patience is a virtue and I can wait a few more months for guidance... BUT I DON'T WANT TO WAIT!!!!

[d]

bad news: of the total amount, i believe that anything which has not previously been taxed (including earnings) is taxable. it would seem that you might want to spread the transfer over several years to keep the tax down. if the company only wants to cut one check, you could transfer it all to a TIRA, and from there a portion to a Roth.

[riskadverse]

Not sure what you are refering to as "after tax account", but a 401K is usually all tax defered (contributions and earnings) and you'll pay income tax on any amount you transfer into a Roth IRA.

[dmpi]

The 401K that we belong to lets you select between before taxes or after taxes.
If you select "before taxes" & hit the yearly 15K max, the extra money will go in as after tax.
You will have to pay tax on the dollars generated from the after tax portion.
Our 401K will not let you withdraw the after-tax dollars without taking before-tax part along with it.

[heyyou]

d is right, riskaverse just isn't familar with after-tax contributions to a 401k. The regular untaxed 401k contributions and the earnings from them are taxable upon withdrawal or Roth conversion. The after tax contributions are already taxed, but the earnings haven't been taxed yet. So the Roth conversion amount times a % (total untaxed amount in 40lk)) divided by (the total amount of the 401k) equals the income that is taxed. Also, any other TIRAs are added in with the previously untaxed 401k amount in the numerator and the denominator of the %. All of your tax-sheltered dollars (none of your other currently tax-free Roth dollars) are used in the % calculation. Being taxed on only a % portion of the whole conversion amount is good, that is how the after tax contributions enter the Roth. However much you convert each year to Roth, I believe you are only paying income tax on 33.7% of the conversion amount. Would others please check my math.

[New Thinking]

My understanding...All before tax account value becomes taxable (though spread over two years if done in 2010 - but be careful because rates go back up after sunset provisions kick in - believe this is in 2011)..All after-tax over your cost basis would become taxable (cost basis is the amount you yourself contributed).

[d]

Would others please check my math.

that seems correct