Any CPAs/Tax Experts? I have a couple of questions...

[sariana]

My husband has some money that needs to be dealt with, and we are having trouble getting a straight answer as to what the IRS allows. We have two completely separate situations, but the question is similar for each. Our financial advisor could not help us, and a tax specialist I spoke to did not know the answer offhand either, which worries me.

Scenario 1:
DH took a lump-sum distribution of his pension from a former employer. While an employee there, he had to contribute to the pension. These are after-tax dollars. Teh payment came as 2 separate checks--the employer funds plus all earnings, which we already rolled over into a traditional IRA, and the employee contributions, which we would like to roll over into his Roth IRA. Can he do that, or will it show up as a contribution? (We are ineligible to contribute to a Roth.) What are other options? We do not want to take it as cash--it is retirement money.

Our financial advisor says "people do this all the time, but the IRS has not advised" on its allowability. We don't want to get hit with taxes and/or a penalty years down the road if the IRS decides it was NOT allowed.

Scenario 2:
DH's current employer allows after-tax contributions to his 401(k). If he takes these contributions, can he roll them over into his Roth? And same question as above: Is it viewed as a conversion (desired) or a contribution (not allowed for us)? If a rollover to a Roth is allowed, can we set it up so that the conversion happens before the contributions have any earnings, to avoid taxes on those?

DH was told (by a colleague) that this is allowed, but it seems like an unfair circumvention of the Roth limits. It would allow us to put many times more $$$ into the Roth than the normal contribution limits allow.

Has anyone dealt with this?

(And why is it that anything my DH touches is super complicated? I mean, who has ever even THOUGHT of these questions?)

Thanks!

[sariana]

Bumping because I posted in the middle of the night.

[tabegle]

I'm not a CPA, but I'm pretty good with retirement plans.

For scenario one: He can roll into a Roth IRA, but it might be advisable to open a new Roth IRA to keep the Employee contributed money separate from previous actual Roth contributions for the different rules associated with the different types of monies.

For scenario two: I'm a little confused. He can contribute to the after-tax account. He probably cannot take a distribution from that account until termination. Because you can't take (rollover) the money until termination, you can't move the money into any type of personal IRA before that money has earnings.

[sariana]

Sorry, I should clarify. For scenario 2, his employer allows in-service distributions at any time. Apparently this is unusual, but it is allowed for him. He does not have to wait until he reaches a certain age and/or leaves the employer. We know he can do it--it is the tax implications we are unsure about.

For scenario 1, what are the different rules? It is all after-tax money. Is it just a record-keeping issue? We keep pretty good records.

Thank you so much for your reply! We've been going around in circles and hitting walls.

[tabegle]

Sorry, I should clarify. For scenario 2, his employer allows in-service distributions at any time. Apparently this is unusual, but it is allowed for him. He does not have to wait until he reaches a certain age and/or leaves the employer. We know he can do it--it is the tax implications we are unsure about.

This is unusual. The employer after-tax account (should I assume this is a Roth?) would still be limited by the 402(g) contribution limit each year. Even if you take a distribution from the account, the maximim amount he can contribute to the account each calendar year is limited by the 402(g) limit.

For scenario 1, what are the different rules? It is all after-tax money. Is it just a record-keeping issue? We keep pretty good records.

I honestly don't remember. However, if you don't ever plan on rolling the Roth IRA EE (employee) money ever back into an employer sponsored plan, I think you are okay to merge the Roth EE money into the normal Roth IRA


I'm going on an assumption you are talking about 401(k), 403(b) or 457(b) plans. If these are 457(f), or top hat, or other plans, all my advice goes out the window.

[anatolia]

I am not a tax advisor, but answering based on our experience. We only encountered scenario 2. As far as we know, you can only do it after you leave your employer, not while being employed by your employer. DH has both Roth 401K (after-tax contribution) and normal 401k. He rolled over his Roth 401k to his Roth IRA and it was not counted as a contribution. He also rolled over his normal 401k to his traditional IRA.

[sariana]

I am not a tax advisor, but answering based on our experience. We only encountered scenario 2. As far as we know, you can only do it after you leave your employer, not while being employed by your employer. DH has both Roth 401K (after-tax contribution) and normal 401k. He rolled over his Roth 401k to his Roth IRA and it was not counted as a contribution. He also rolled over his normal 401k to his traditional IRA.

Thank you for your response. Yes, we are familiar with doing it after separation from an employer. But DH can take distributions before leaving this employer, and the rarity of that situation is what is causing the confusion, I think. I contacted a CPA referee by our financial advisor, but he didn't know either!

Is it possible to contact the IRS directly? How can we find out the definitive answer?

[tabegle]

You can probably ask the employer to contact the plan administrator to find out the maximum DH is allowed to defer per calendar year.

In my experience, if someone contributes $17,500 for 2013, and they take a $10,000 distribution, they still contributed $17,500 and met the contribution limit (unless they are age 50 and qualify for catch-up contributions).

What type of retirement plan is it?

[sariana]

We know the contribution limits. It is a regular 401(k) plan. Our only question is: if we roll over the after-tax $$ to the Roth, will it be considered a conversion (which is fine) or a Roth contribution (which is not because we are not eligible to contribute to a Roth). Someone told DH he can do this, but it seems shady to us. If we can do it, that would be awesome because it would greatly improve our retirement savings. But we don't want to be tax cheats, even by accident.

[o_mom]

We know the contribution limits. It is a regular 401(k) plan. Our only question is: if we roll over the after-tax $$ to the Roth, will it be considered a conversion (which is fine) or a Roth contribution (which is not because we are not eligible to contribute to a Roth). Someone told DH he can do this, but it seems shady to us. If we can do it, that would be awesome because it would greatly improve our retirement savings. But we don't want to be tax cheats, even by accident.

I think this article and pdf may address your situation: http://www.napa-net.org/news/technic...-to-roth-iras/

http://cdn.ameriprisecontent.com/cds...6110589130.pdf

The first references several IRS notices, so those might be a good place to start.