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Author: TMFPixy Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 76238  
Subject: Re: Pre-tax / After-tax 401K roll-over investing Date: 2/5/1999 10:29 AM
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Greetings, Darlene, and welcome. You asked:

<<Question: I am a retiree and have a 401k plan that I wish to convert to an IRA. There is both pre-tax and after-tax money in the plan.

Can both the pre-tax and after-tax 401k monies be invested in separate IRA's with a broker as a Custodian?

Would the after tax 401K money in effect be then similar to a Roth IRA, being that it is after-tax money.

Given that the gain is taxed prior to an IRA rollover, would it be more prudent to leave in 401K at approximately 15% annual gain or pay tax and roll into an IRA? And convert that IRA to a Roth IRA?

Is this a conceptual scenario, as I am quite prepared to leave after tax as it is and only rollover pre-tax 401K to IRA.>>


As Tonga noted, after-tax contributions may not be transferred to an IRA when you receive a distribution from a 401k plan. Only the previously untaxed 401k contributions and all earnings within your account are eligible for a rollover to a traditional IRA. Your plan administrator will send you a separate check for your after-tax money. On receipt, it's yours to do with what you wish. It is not considered income to you, so it will not be taxed again. Therefore, you may spend it or put it in a taxable investment of your choice. You just can't put it in an IRA as rollover money.

The rest of your distribution may only be transferred to a traditional IRA to continue its tax-deferred status. Retirement plan money may not be transferred directly to a Roth IRA. It must stop in the traditional IRA first. To avoid any tax withholding issues, you should arrange for a direct transfer of that money from the plan custodian to the traditional IRA custodian. Do not have the money sent to you in a check made out in your name. If you do, then 20% of that amount must by law be withheld for potential taxes on that distribution. Thus, you get only 80%. If all you deposit in an IRA is that 80%, then come tax time the IRS will say the 20% withholding was received by you and you will be taxed on that amount. The only way you may avoid paying taxes is to come up with the missing 20% from other resources at the time of your rollover, add that amount to the 80% you received, and then put all of it into an IRA within 60 days after you received the 80% distribution. You won't get back the 20% withheld until you get a refund on your tax bill for the year. The only way to avoid that situation is through what's called a direct transfer between the plan and IRA custodians. Don't worry, though, because both know how to do that. Just tell both what you wish to do, and they will guide you through the necessary steps to get it done. In a direct transfer, no money is withheld for taxes, so it all gets into the IRA with no problem to you.

Regards….Pixy

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