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Hello,

With the 2013 change permitting 401k conversions to Roth 401k does this change the pro rata calculation for IRA to Roth IRA conversions?

I.e. now that individuals can convert their active 401k accounts into Roth 401k accounts, do 401k's get lumped in the traditional IRA-type accounts (IRA/SEP/SIMPLE/etc) for the "big undifferentiated pot of money" Traditional IRA pro rata calculation when making a conversion.

The often given example is:

Jack as a Rollover IRA with $45,000 (untaxed contributions) in it. He contributes $5000 into a Traditional IRA and converts it into a Roth IRA. In reality the accounting is that Jack converted 10% of his IRA (the $45,000 in the Rollover PLUS the $5000 in the Traditional IRA). Jack owes taxes of $4500 (90% of the money came from the Rollover IRA). He now has to track that he has $4500 of already taxed money in his Rollover IRA which is a tracking/accounting mess.

A couple of questions?

1) Does the entire 401k account fall into the same bucket as the traditional IRA-type accounts (IRA/SEP/SIMPLE/etc) above in 2013 because the law says you can make a conversion in 2013?
2) Does the entire 401k account fall into the same bucket as the above Rollover IRA in the above example in 2013 if the law says you can convert but your 401k plan says you can’t convert in 2013?
3) I assumed that none of this mess applied in earlier years because 401k’s are not treated the same IRA’s, was that true?

Thanks in Advance,
SJColeman
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With the 2013 change permitting 401k conversions to Roth 401k does this change the pro rata calculation for IRA to Roth IRA conversions?

No.

There seems to be some confusion about this provision. In-plan "conversions" to Roth have been allowed previously. This is just housekeeping to make them easier, thus, in theory, more attractive so that people will flock to them, thus producing the revenue necessary to "pay" for kicking the sequestration can 2 months down the road.

Nothing of note to the employee has changed in the law.

Phil
Rule Your Retirement Home Fool
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There seems to be some confusion about this provision. In-plan "conversions" to Roth have been allowed previously. This is just housekeeping to make them easier, thus, in theory, more attractive so that people will flock to them, thus producing the revenue necessary to "pay" for kicking the sequestration can 2 months down the road.

Nothing of note to the employee has changed in the law.


I was under the impression that previous in-plan rollovers required the money to be distributable (employee over 59-1/2, for example), while the provision in the fiscal cliff legislation basically lets anyone do the rollover. Is that not the case? If it is, that seems like a significant change.

Also on in-plan rollovers, if I've contributed a mix of pre-tax and post-tax money to my 401k, would a rollover be handled the same as a TIRA to Roth rollover that includes pre- and post-tax money (i.e. prorating the taxed vs. non-taxed amount)? I'm guessing yes, but so far my Google-fu has failed to turn up a definitive answer.

Thanks,
Brian
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I was under the impression that previous in-plan rollovers required the money to be distributable (employee over 59-1/2, for example), while the provision in the fiscal cliff legislation basically lets anyone do the rollover. Is that not the case? If it is, that seems like a significant change.

There was never an age restriction because you aren't removing the funds from the 401(k) account. You are converting them from the "regular" part of the 401(k) to the Roth part of the 401(k). You don't get to combine these funds with a Roth IRA that you might already have UNLESS you are at an age/situation where you can take a 401(k) distribution. And, if your employer doesn't offer a Roth 401(k) option, you don't have any additional cptions under the new legislation.

Also on in-plan rollovers, if I've contributed a mix of pre-tax and post-tax money to my 401k, would a rollover be handled the same as a TIRA to Roth rollover that includes pre- and post-tax money (i.e. prorating the taxed vs. non-taxed amount)? I'm guessing yes, but so far my Google-fu has failed to turn up a definitive answer.

I would think so, but I haven't done any research to confirm/refute this.

Ira
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I was under the impression that previous in-plan rollovers required the money to be distributable (employee over 59-1/2, for example), while the provision in the fiscal cliff legislation basically lets anyone do the rollover. Is that not the case? If it is, that seems like a significant change.

You're correct. It was a poor choice of words on my part. I was fixed on correcting the implication in the OP that such rollovers were not possible at all before this legislation. Thanks.

I'll need to do some more research on what happens when one has after-tax money in a traditional 401(k) account. I think that after-tax money cannot be rolled into a Roth 401(k) component, but don't hold me to that.

Finally, remember that just because a plan can do something doesn't mean it must. As always with issues on these accounts, the first place to check is with the plan in question.

Phil
Rule Your Retirement Home Fool
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