IRA Rollover

Archive for November, 2008

Question: Roth 401(k) rolled into Rollover IRA?

Last year I rolled my Roth 401(k) into a rollover IRA before Roths were allowed to be segregated out. That rollover also includes the regular 401(k) pre-tax contributions my employer made. I still want to get the benefits of the Roth that I have already paid taxes on. What are my options?

Answer: By moving the 401k into a traditional IRA, it no longer has the Roth advantages. In order to undo this, you will pay some income tax.

You need to keep a record of what amount of the rollover was after-tax and what amount was pre-tax. The amount of the 401k money that was contributed after-tax, is your basis in your traditional IRA. If you take distributions from this IRA, you will not again pay tax on the after-tax contributions. This is figured using Form 8606 in the year you take a distribution.

The “Roth” advantages that applied to the earnings on your Roth401k contributions were lost when you converted to a traditional IRA.

In order to regain the Roth advantages, you will have to convert the IRA to a Roth IRA. In 2010 there are no income restrictions, so this conversion is possible for you. You will pay income tax on any amounts in the IRA that are not after-tax contributions, in the year you make the conversion.

Hopefully, this is your only traditional IRA. If it is not, then when you convert, you must consider the total of all of your IRAs when you figure the amount of tax due. You can’t choose only to convert the IRA that is mostly after-tax money. So in order to regain the all the Roth advantages, you have to convert all of your traditional IRAs to Roth IRAs and pay income taxes on all of the conversion except for the basis.

Should You Convert Your IRA To A Roth IRA?