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Old 03-16-2018, 09:06 AM
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Join Date: Mar 2018
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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