QUESTION: I visited your website and have one question about roll-overs to a Roth IRA or a Roth 401(k):
– I am invested in a company sponsored 401(k) and 1/3 of my balances is made up of after tax contributions
– In case of a roll-over to a Roth plan, can I transfer my entire plan savings or only the pre-tax part?
ANSWER: Yes plan participants have the option to roll over their employee after-tax funds to a Roth IRA or a solo 401k. IMPORTANT: In the case of the solo 401k, the after tax employee contributions would first need to be directly rolled over to the solo 401k non Roth account and the converted to the Roth Solo 401k designated account. Thanks to the Pension Protection Act, effective January 1, 2008 the rules allow retirement plan participants (and beneficiaries) to roll over plan assets from qualified plans such as 401k, 403b, and 457b plans to Roth IRAs. In addition Thrift Savings Plans (TSPs) may be rolled over to Roth IRAs.
Plan participants may roll over to a Roth IRA any part of an employer plan EXCEPT for the following types:
- Required minimum distributions
- Distributions that are made up of substantially equal periodic payments
- Hardship withdrawals
- Excess deferrals or excess contributions
- Plan loan amounts
- Dividends from employer securities as listed in IRC Sec. 404(k)
- Life insurance PS 58 costs
IMPORTANT: When distributions are made from a qualified plan such as a 401k, the distributions are generally treated as consisting of a pro rata portion of pretax and after-tax funds. This is meant to prevent a participant from only converting the after tax 401k contributions to a Roth IRA or a designated Roth 401k account. Moreover, if the 401k participant takes a distribution and then rolls over the distribution within 60 days, the rules deem the first dollars rolled over as pretax funds. This is meant to prevent the 401k participant from only rolling over the after-tax funds. Please note that if the after-tax amounts are separately accounted for, the pro-rata rule only applies at the account level (i.e., only the after-tax sub account).
Kjell in New Jersey