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Old 03-16-2018, 09:06 AM
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Location: Texas
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Recharacterizing of 401K Rollover to Roth

I retired last year. Prior to retiring, I rolled over after-tax 401K money to a Roth thinking it would be treated as an in-kind transfer and not be any tax consequences. My company says the funds are earnings (and I think untaxed company contributions) on after-tax contributions made (before 1987) and therefore need to be taxed before going into the Roth. (Yes, I had a financial planner working with me who may have missed this but my company didn't tell me that would be the case.) I guess it makes sense since any money that goes into a Roth must first be taxed? Unfortunately, this has caused a HUGE swing in my taxes since that money was added to my income last year (2017)!

I'm still working with my company to be sure this is correct, but assuming it is correct, in speaking briefly with a CPA, she mentioned the possibility of recharacterizing the rollover.

Oddly enough, in Pub 590-A pg 21, the very definition of a Rollover is "Generally, a rollover is a tax-free distribution to you of cash or other assets from one retirement plan that you contribute to another retirement plan. The contribution to the second retirement plan is called a rollover contribution.?. Note the "Generally" qualifier.

On pg 46 is the following "Direct rollover option. Your employer's qualified plan must give you the option to have any part of an eligible rollover distribution paid directly to a Roth IRA. Generally, no tax is withheld from any part of the designated distribution that is directly paid to the trustee of the Roth IRA." Note again, there is a "Generally" qualifier. I haven?t yet found

My questions are:
1) Considering the Direct rollover option... should the direct rollover have been taxed to start with, considering my company says it was after tax earnings and company contributions that have never been taxed (as they would have if I had taken them as a withdrawal)?
2) If so, can I recharacterize this Roth rollover to a Traditional IRA even though it came from my 401K? (i.e., does it matter where the money came from since it is already in the Roth?

Thanks very much!

O.K., after posting and further reading on Rollovers from an employer's plan to a Roth, I see the following which is probably the nasty caveat to not getting taxed... "Income. You must include in your gross income distributions from a qualified retirement plan that you would have had to include in income if you hadn’t rolled them over into a Roth IRA. You don’t include in gross income any part of a distribution from a qualified retirement plan that is a return of basis (after-tax contributions) to the plan that were taxable to you when paid. These amounts are normally included in income on your return for the year of the rollover from the qualified employer plan to a Roth IRA."


Last edited by Lone Star Guy : 03-16-2018 at 09:19 AM. Reason: More Information


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Old 03-16-2018, 09:22 AM
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Join Date: Mar 2018
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A bit more...

O.K., after posting and further reading on Rollovers from an employer's plan to a Roth, I see the following which is probably the nasty caveat to not getting taxed... "Income. You must include in your gross income distributions from a qualified retirement plan that you would have had to include in income if you hadn?t rolled them over into a Roth IRA. You don?t include in gross income any part of a distribution from a qualified retirement plan that is a return of basis (after-tax contributions) to the plan that were taxable to you when paid. These amounts are normally included in income on your return for the year of the rollover from the qualified employer plan to a Roth IRA."

With all that, and that is probably how my company is seeing it and my 1099-R reflects that, I guess my only hope is recharacterization out of the Roth.



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Old 03-17-2018, 04:59 AM
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I retired last year. Prior to retiring, I rolled over after-tax 401K money to a Roth thinking it would be treated as an in-kind transfer and not be any tax consequences.===========>> Since you made after-tax contributions to the 401K, you can roll them directly into a R-IRA without paying taxes on the after-tax amount, as long as the associated pretax earnings are also distributed from the plan at the same time.so, you are permitted to roll the after-tax 401K contributions to a R-IRA. Some 401K plans allow after tax contributions. This is advantageous as money in a R-IRA accumulates interest, dividends and capital gains that are tax-free.



As mentioned above;correct;unless you rollover your reg 42K to a R-IRA. So in your case, You will not pay taxes on the money when you convert to the R-IRA. (The reason: You did not got a tax deduction for your contributions to your reg 401K and paid taxes to move it to a R-IRA, which is also designed to hold after-tax money.) I men, A Roth is a retirement savings plan for after-tax money. The benefit: When you withdraw the money from the R-IRA after you are retired, you won?t owe taxes.

Unfortunately, this has caused a HUGE swing in my taxes since that money was added to my income last year (2017)!============>>it depends; you can?t take a distribution of only the after-tax amounts and leave the rest in the plan. Any partial distribution from the plan must include some of the pretax amounts. To roll over all of your after-tax contributions to the R-IRA, you could take a full distribution all after-tax amounts, and directly roll overafter-tax amounts to the R- IRA

I'm still working with my company to be sure this is correct, but assuming it is correct, in speaking briefly with a CPA, she mentioned the possibility of recharacterizing the rollover. =================>I guess it depends;. your contribution may benefit from a recharacterization if the value of your investments has declined since the time you made the conversation from after tax 401K to the Roth. Another important reason is that your contribution was deemed ineligible and you want to avoid penalties.


Oddly enough, in Pub 590-A pg 21, the very definition of a Rollover is "Generally, a rollover is a tax-free distribution to you of cash or other assets from one retirement plan that you contribute to another retirement plan. The contribution to the second retirement plan is called a rollover contribution.?. Note the "Generally" qualifier.=======>In general yes but it depends; in your case it is tax free not taxable rollover; A rollover occurs when you withdraw cash / other assets from one eligible retirement plan, in yoiur case after tax 401K, and contribute all or part of it, within 60 days, to another eligible retirement plan, the R-IRA. This rollover transaction isn't taxable, unless the rollover is to a R-IRA from before tax 401K, but it is reportable on your federal tax return.however if there is, then, you must include the taxable amount of a distribution that you don't roll over in income in the year of the distribution.

On pg 46 is the following "Direct rollover option. Your employer's qualified plan must give you the option to have any part of an eligible rollover distribution paid directly to a Roth IRA. Generally, no tax is withheld from any part of the designated distribution that is directly paid to the trustee of the Roth IRA." Note again, there is a "Generally" qualifier. I haven?t yet found ========>thi sis correct;

My questions are:
1) Considering the Direct rollover option... should the direct rollover have been taxed to start with, considering my company says it was after tax earnings and company contributions that have never been taxed (as they would have if I had taken them as a withdrawal)?=======>>>>>I think so;however, the benefits of an after tax 401k withdrawal are plainly obvious. You?ve already paid taxes on the money you have put into the 401K account, so when you withdraw it, you owe nothing else to the IRS; The primary difference between the after-tax 401K contribution and the R-IRA contribution is the tax treatment of earnings on the client?s investment. While all R-IRA contributions are permitted to grow on a tax-free basis ,i.e., the entire amount of the withdrawal will generally be tax-free, however, earnings on after-tax contributions will eventually be taxed at the client?s ordinary income tax rates.
As a result, only taxpayers who are already contributing the maximum pre-tax and R-IRA amounts to their retirement accounts should consider the after-tax contribution option .



?
2) If so, can I recharacterize this Roth rollover to a Traditional IRA even though it came from my 401K? (i.e., does it matter where the money came from since it is already in the Roth========>>>>> The tax law passed in Dec. 2017 eliminated the ability to recharacterize R-IRA conversions for taxable years after 2017. So aaslongas you converted to a R-IRA in 2017 and wan t to reverse the conversion,then, you need to complete a recharacterization by the Oct. 2018 deadline; You cannot recharacterize funds rolled from an employer plan,i.e., 401K plan to a R-IRA. You can only convert / rollover r ?ira to 401K . The pro-rata tax rule applies so part of the conversion will be tax-free and part will be taxable.after the conversion yu may roll over your IRA into your 401(k) plan, assuming the retirement plan has language allowing it to accept this type ofrollover. I guess you need some professional help form your retirement admin.



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Old 03-19-2018, 03:36 PM
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Join Date: Mar 2018
Location: Texas
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Quote:
Originally Posted by Wnhough View Post
I retired last year. Prior to retiring, I rolled over after-tax 401K money to a Roth thinking it would be treated as an in-kind transfer and not be any tax consequences.===========>> Since you made after-tax contributions to the 401K, you can roll them directly into a R-IRA without paying taxes on the after-tax amount, as long as the associated pretax earnings are also distributed from the plan at the same time.so, you are permitted to roll the after-tax 401K contributions to a R-IRA. Some 401K plans allow after tax contributions. This is advantageous as money in a R-IRA accumulates interest, dividends and capital gains that are tax-free.



As mentioned above;correct;unless you rollover your reg 42K to a R-IRA. So in your case, You will not pay taxes on the money when you convert to the R-IRA. (The reason: You did not got a tax deduction for your contributions to your reg 401K and paid taxes to move it to a R-IRA, which is also designed to hold after-tax money.) I men, A Roth is a retirement savings plan for after-tax money. The benefit: When you withdraw the money from the R-IRA after you are retired, you won?t owe taxes.

Unfortunately, this has caused a HUGE swing in my taxes since that money was added to my income last year (2017)!============>>it depends; you can?t take a distribution of only the after-tax amounts and leave the rest in the plan. Any partial distribution from the plan must include some of the pretax amounts. To roll over all of your after-tax contributions to the R-IRA, you could take a full distribution all after-tax amounts, and directly roll overafter-tax amounts to the R- IRA

I'm still working with my company to be sure this is correct, but assuming it is correct, in speaking briefly with a CPA, she mentioned the possibility of recharacterizing the rollover. =================>I guess it depends;. your contribution may benefit from a recharacterization if the value of your investments has declined since the time you made the conversation from after tax 401K to the Roth. Another important reason is that your contribution was deemed ineligible and you want to avoid penalties.


Oddly enough, in Pub 590-A pg 21, the very definition of a Rollover is "Generally, a rollover is a tax-free distribution to you of cash or other assets from one retirement plan that you contribute to another retirement plan. The contribution to the second retirement plan is called a rollover contribution.?. Note the "Generally" qualifier.=======>In general yes but it depends; in your case it is tax free not taxable rollover; A rollover occurs when you withdraw cash / other assets from one eligible retirement plan, in yoiur case after tax 401K, and contribute all or part of it, within 60 days, to another eligible retirement plan, the R-IRA. This rollover transaction isn't taxable, unless the rollover is to a R-IRA from before tax 401K, but it is reportable on your federal tax return.however if there is, then, you must include the taxable amount of a distribution that you don't roll over in income in the year of the distribution.

On pg 46 is the following "Direct rollover option. Your employer's qualified plan must give you the option to have any part of an eligible rollover distribution paid directly to a Roth IRA. Generally, no tax is withheld from any part of the designated distribution that is directly paid to the trustee of the Roth IRA." Note again, there is a "Generally" qualifier. I haven?t yet found ========>thi sis correct;

My questions are:
1) Considering the Direct rollover option... should the direct rollover have been taxed to start with, considering my company says it was after tax earnings and company contributions that have never been taxed (as they would have if I had taken them as a withdrawal)?=======>>>>>I think so;however, the benefits of an after tax 401k withdrawal are plainly obvious. You?ve already paid taxes on the money you have put into the 401K account, so when you withdraw it, you owe nothing else to the IRS; The primary difference between the after-tax 401K contribution and the R-IRA contribution is the tax treatment of earnings on the client?s investment. While all R-IRA contributions are permitted to grow on a tax-free basis ,i.e., the entire amount of the withdrawal will generally be tax-free, however, earnings on after-tax contributions will eventually be taxed at the client?s ordinary income tax rates.
As a result, only taxpayers who are already contributing the maximum pre-tax and R-IRA amounts to their retirement accounts should consider the after-tax contribution option .



?
2) If so, can I recharacterize this Roth rollover to a Traditional IRA even though it came from my 401K? (i.e., does it matter where the money came from since it is already in the Roth========>>>>> The tax law passed in Dec. 2017 eliminated the ability to recharacterize R-IRA conversions for taxable years after 2017. So aaslongas you converted to a R-IRA in 2017 and wan t to reverse the conversion,then, you need to complete a recharacterization by the Oct. 2018 deadline; You cannot recharacterize funds rolled from an employer plan,i.e., 401K plan to a R-IRA. You can only convert / rollover r ?ira to 401K . The pro-rata tax rule applies so part of the conversion will be tax-free and part will be taxable.after the conversion yu may roll over your IRA into your 401(k) plan, assuming the retirement plan has language allowing it to accept this type ofrollover. I guess you need some professional help form your retirement admin.

So, regarding the very last item, 1) my retirement administrators for my company only chant the company line... that EARNINGS on S(tock) Pre-1987 contributions when rolled over from 401K to a R-IRA are taxable. I can actually understand why, since money going into a Roth must first be taxed. I'm just looking for a legal way to reverse or recharacterize that transaction, if it exists, since my administrator had no clue (didn't tell me) when he did the rollover that I would be taxed on the EARNINGS and my financial advisor didn't either.

Can someone point me to IRS documentation that indicates for sure that I cannot recharacterize money that was directly rolled over from a 401K to a R-IRA? Any explanation as to why not?

Thanks!



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Old 03-21-2018, 02:05 AM
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Join Date: Oct 2010
Posts: 5,123
Quote:
Originally Posted by Lone Star Guy View Post
So, regarding the very last item, 1) my retirement administrators for my company only chant the company line... that EARNINGS on S(tock) Pre-1987 contributions when rolled over from 401K to a R-IRA are taxable. I can actually understand why, since money going into a Roth must first be taxed. I'm just looking for a legal way to reverse or recharacterize that transaction, if it exists, since my administrator had no clue (didn't tell me) when he did the rollover that I would be taxed on the EARNINGS and my financial advisor didn't either.

Can someone point me to IRS documentation that indicates for sure that I cannot recharacterize money that was directly rolled over from a 401K to a R-IRA? Any explanation as to why not?

Thanks!
you must generally be separated from your employer to roll your 401k into a R-IRA. However, some employers do permit an in-service rollover, where you can do the rollover while still employed. Before Jan. 1, 2008, you were not able to roll your 401K into a R-IRA directly at all. Still, just because the law has made this option available doesn?t mean you can definitely roll your old 401K into a R-IRA no matter what. As said, it all depends on your plan admin.



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