A few things Roth

Photo by Autumn Mott

There are a few things you can do between 401k’s, Roth 401k’s, Roth IRAs and traditional IRAs … but the rules are tricky so don’t try these at home without the assistance of an experienced tax preparer! You don’t want to crack any nest eggs moving them between baskets!

If your 401k has both after-tax contributions and pretax contributions, you can split a rollover out of the 401k, either when qualitifed to do so, or if the plan allows for in-service rollovers, between a Roth (after-tax contributions) and an IRA. You may also do an in-plan rollover if the plan rules allow. This allows for a direct Roth conversion tax-free on the after-tax contributions without mixing money in an IRA first that may bypass the prorata rules IRAs have with both pretax and after-tax contributions.

Rollovers by NON-spouse beneficiaries have a special rule IF the plan allows it, to rollover plan assets directly to an inherited Roth IRA (not your own Roth). The heir pays the tax bill on the converted amount (same rules as for any conversion by heirs) and may be a good move if the heir wants to take their RMDs from a Roth instead of paying taxes each year on IRA RMDs. This may make sense if the IRA RMDs push the heir into income categories that may affect other benefits or taxes. Note that nonspouse heirs cannot convert an inherited IRA to a Roth otherwise, since only the original owner can make that conversion.

As I mentioned, it is highly recommended to use a qualified tax-preparer for these moves. A good Enrolled AgentCPA or Registered Tax Return Preparer can help you prepare the strategy BEFORE you try these moves, since getting things out of sequence or not using the proper forms and processes with the custodians, may invalidate the move and put you worse off. The first question to ask them is if they’ve successfully done this before!

PS. “Tax-sheltered annuity plans (403(b) plans). If you work for a public school or certain tax-exempt organizations, you may be eligible to participate in a 403(b) retirement plan offered by your employer. Although this publication covers the treatment of benefits under 403(b) plans and discusses in-plan Roth rollovers from 403(b) plans to designated Roth accounts, it doesn’t cover other tax provisions that apply to these plans. For that and other information on 403(b) plans, see Pub. 571, Tax-Sheltered Annuity Plans (403(b) Plans) For Employees of Public Schools and Certain Tax-Exempt Organizations.”

Photo by Autumn Mott on Stocksnap.



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