401k afer tax conversion

[harley]

I've got a 401k with my former employer that I'm finally getting around to rolling into my Vanguard IRA. However, I had to do an address change and they froze the process for 15 days to make sure I'm not a scammer. No problem there.

However, it seems I've got about $10.5K in after tax or non-qualified dollars in there. I guess I over-invested whatever the limit was back in the early days. So the rep I was talking to told me I could either roll the money into the IRA and keep track of it for the rest of my life, or they could send me a check, no penalty, no taxes.

That is probably what I'll do, but then I got to thinking: "Could I roll this money into a Roth IRA directly since it's already been designated as IRA-type money?" I've got very little in Roths, because I've seldom qualified either to invest or to roll over. And the little I managed to get invested into one got nearly wiped out in the tech bursting bubble of 2000.

I asked my accountant friend, and he said he didn't know. He's going to check into it for me, but I thought one of the geniuses who frequent this board might have a clue. Any help would be appreciated.

[Telly]

I had the same situation when working. For years I was triggering the "highly compensated individual" rule somewhere during the year. That diverted the rest of the year's contributions to after-tax. When I rolled the 401k into an IRA, I could not open a Roth due to high income that year, what with severance payment and lots of stored-up vacation $. So it just went to after-tax investing.

Since you are retired, and in a different tax year than when you first retired, you can probably start up a Roth now. But I believe you will be limited to the max catch-up contribution amount for your age. So the after-tax $ from the 401k aren't anything special.

[Martha]

IIRC, in late 2007 or early 2008 the rules changed and you can rollover all or part of a 401k directly to a Roth. But, you have to be sure that you can get a separate distribution from your employer for the after tax money. And you probably have to meet the income limits to be eligible for the Roth.

For more info, you might want to read:
Publication 575 (2007), Pension and Annuity Income
Publication 590 (2007), Individual Retirement Arrangements (IRAs)

[harley]

Thanks for the replies. I'm still not sure what I can do. The rollover might work, and I can definitely get the seperate distribution. However, I don't have any earned income this year, and I think I'll still be over the total amount of income for a Roth conversion. Very confusing.

I think I'll just take the cash, put it in a sock, and wait until next year. By then I should have my finances under better control tax wise and be able to slowly start converting traditional IRAs to Roths. My biggest concern is that the 2010 changes that allow you to convert no matter what your income level will be gutted. Oh well, you can only do what you can do.

Thanks again.

[crazy connie]

The IRS has yet to issue the guidelines for direct 401K after tax to ROTH conversions. If you do not want to wait, you can stuff it into a sock (90 day CD) and use it to pay conversion taxes next year or whenever your peapicking heart desires.

[Achiever51]

Harley, I faced the same issue two years ago -- but my after-tax sum was around $50K. I wanted to roll it into a ROTH, because like you, I did not qualify for one while I was working, but I still couldn't do it. However, I was able to put it into a Traditional IRA at Vanguard, with the rest of my pre-tax 401k rolled over into a Rollover IRA -- that way I can keep the two separate for tax reporting purposes.