Can you contribute to an IRA rollover?
Some 401 (k) plans allow after-tax contributions. When you retire, you can transfer this after-tax 401 (k) money to a Roth IRA. This is beneficial because money in a Roth accumulates interest, dividends, and capital gains that are tax free.
Here are some common questions about how this type of rollover works.
I heard that the IRS rules are not clear about how to put after-tax money into a Roth fund.
For many years the finance and tax world was unsure whether after-tax money in a business plan could legally be included in a Roth IRA.
In September 2014, an IRS ruling clarified this and the answer is a definite "yes". As a result, you are permitted to transfer the post-tax contributions from a qualified company pension plan to a Roth IRA. Details on the regulations and the interpretation of the rules can be found at:
- IRS regulations on rollover of after-tax contributions in retirement plans
- Splitting After-Tax 401k posts for Roth conversion
The administrator will separate two separate checks
To rollover an after-tax 401 (k) fund to a Roth IRA, your plan administrator will cut two checks; one for the post-tax contributions and one for the pre-tax money. You can tax the after-tax contributions to go straight to a Roth IRA account while the pre-tax money is rolled into a traditional IRA. You would set the appropriate account for each individual contribution type on your 401 (k) distribution papers.
What happens if you put the funds in the wrong account?
When you receive a rollover check, you have 60 days to redeem it on the appropriate account.
If you miss the 60 day period, your rollover will not count as a rollover. Occasionally someone will write to me trying to correct such a rollover error. Below is one such question I received:
I just stepped back and had a chance to roll my 401 (k). I think I made a very big mistake because I had after-tax money that I understand could have ended up in a Roth IRA. Since it's past the 60 day rollover deadline and I've deposited the after-tax check in a brokerage account, do I have recourse as I believe I've really blown a golden opportunity? (I can prove that it is after-tax money and that it is still in the account in cash.)
Unfortunately the answer to this question is no, there is no recourse. Exceptions to the 60-day rollover timeframe are difficult to achieve if your financial services provider has made a gross mistake. You can look to other ways to get money into a Roth by converting an IRA to a Roth, or if you or a spouse still made income when you were able to contribute to a Roth IRA.
When you retire, be sure to follow all rollover rules to avoid negative tax surprises. Read all documents carefully before submitting them to your plan administrator, and verify account numbers before making any deposits. You can look at your last 401 (k) statement to see how much should be in after-tax money and make sure the amount of check you leave with your Roth is approximate. likely won't be exactly the same amount as on your testimony as funds fluctuate daily as investments change in value).
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