Can I roll over pre-tax and after-tax contributions from a 401(k)?September 17, 2012: 6:30 AM ET
I have an old 401(k) account containing both pre-tax and after-tax contribution dollars and earnings. Can I rollover the pre-tax amount into a Traditional IRA and the remaining after-tax portion into a Roth IRA without triggering any immediate taxes? — Tim C.
This is a gray area, says Jim Blankenship of Blankenship Financial Planning in New Berlin, Ill. "The situation is not completely clear by IRS rules, and the IRS has not made any public statement regarding how to handle it," he says.
One strategy to consider, says Blankenship, is to do the rollover manually. Start by withdrawing the funds from the 401(k) as an indirect rollover. Then roll your pre-tax savings into a traditional IRA, and roll your after-tax savings in a Roth IRA. If you do this within 60 days from your withdrawal, you won't face any taxes or early withdrawal penalties.
Blankenship notes that there are risks with this approach. For starters, your 401(k) plan must keep close track of pre-tax and after-tax contributions to your 401(k). Next, your plan administrator will withhold 20% of your taxable distribution, but you still need to deposit the entire taxable amount into your traditional IRA within the 60-day window to avoid taxes and penalties. That means having enough extra cash to cover the shortfall.
Because the IRS stance is not entirely clear on this matter, however, make sure your plan distributor and tax professional are onboard before you start. And keep meticulous records of the transaction.
— Austin Kilham
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