Roth Rollover from After tax 401(k)

[travelover]

I was planning to do a Roth rollover from my after tax 401(k) money next year when the income limits are suspended. I was just informed that my 401(k) is moving from Fidelity to ACS on December 24, so it pushed me to see if there is something I should do before the change is made. Fidelity has a brick and mortar shop close to me and I like their hand holding for the complex stuff.

I contributed about $100K after tax to my 401(k) before I retired. After I retired, I rolled over the pretax money into a rollover IRA and left all the after tax money in the 401(k). So right now my whole 401(k) is after tax money plus some earnings since the rollover in 2007.

Fidelity is suggesting that I roll the 401(k) into another rollover IRA for now, then do a Roth conversion in 2010. I think this will force me to do the Roth conversion prorata with all my other IRAs and I'll end up paying tax on the conversion. If I can just convert the 401(k) directly to a Roth, I should be able to avoid any taxes at all.

If you are still with me - what should I do now? My instinct is to wait until 2010 and do the rollover with ACS.

Thanks.

 

[gindie]

I don't think you're going to be able to do that.

At the very least, you'll have to pay taxes on the earnings that the after-tax 401(k) has generated. That's what you'd have to do if all your money was in a non-deductible traditional IRA instead of the after-tax 401(k).

But, I think the only direct conversion allowed to a Roth IRA is from a Roth 401(k). It doesn't sound like your 401(k) is one of those.

I think you're going to need to do this in 2 stages, like the Fidelity person said. And, yes, that means pro-rata tax computation.

 

[travelover]

Here is what I was basing my hope for a tax free rollover on:

A Sweet Deal on Roth IRA Conversions - Kiplinger.com

The new rule on after-tax contributions is much more liberal than the one that governs a conversion from a traditional IRA to a Roth IRA. In that case, the tax-free portion of the rollover is determined by the ratio of nondeductible pay-ins to the total amount in all of your IRAs. So if your $60,000 IRA contains $6,000 in nondeductible contributions and you convert that $6,000 to a Roth IRA, just $600, or one-tenth of the converted amount, would escape income tax. The remaining $5,400 would be taxed at your regular income-tax rate. But under the new rules for after-tax money in 401(k)s -- and 403(b)s and 457 plans -- the full $6,000 would escape taxes. Plus, there is no limit on how much you may convert.

 

[Shawn]

I don't think you're going to be able to do that.

I admit to being perplexed by the rules, as different people seem to claim different things. For example, this link suggests that it is possible to directly rollover funds from a 401(k) to a Roth.

To the OP, in your situation, waiting until 2010 may be your best option.

 

[travelover]

At the risk of being accused of bumping my own thread........

I called Fidelity's central office to get a second opinion re this after tax portion rollover from my 401(k) to a Roth. They agreed that I can first move all the pretax moneys to my rollover IRA, take the after tax money as a cash payment, then after January 1st, but within 60 days, move the all the cash ($130K) into a Roth. No withholding, no taxes owed.

 

[travelover]

Update

I did it, I think. Working with Fidelity, I asked my new 401(k) administrator to cut two checks directly to Fido to close out my account. One check is pre-tax money and that goes to my rollover IRA account and the second check is after tax money and that goes to a Roth account. By having the checks made out to Fido, I should not have any tax withholding.

If this all goes as Fido assures me it will, I get to roll over more than $100K to a Roth with no taxes owed. The pretax and earnings roll to an IRA where taxes are not due until the money is withdrawn.

The down side is that I can't take out any money from the Roth without penalty for two years, when I'll be 59 1/2. So I either pulled off a coup or really screwed myself. Time will tell.