This is a fairly detailed question for which I would appreciate a detailed answer.
I have money in a 401(k) from a former employer. Some of this money is pre-tax; some is post-tax.
I want to roll this 401(k) into an IRA at another financial institution. I expect my modified adjusted gross income for the year to be less than $100K.
If I had done the rollover last year, I would have been able to put the pre-tax part of the 401(k) into a traditional IRA, and would have had two options with the after-tax part:
1) Put it in the traditional IRA also, along with my other IRA funds; or
2) Take it in cash.
Either way, there would be no immediate tax consequences. However, if I were to take option (1), I would no longer have the option of withdrawing any of this money later unless I were also to withdraw a proportional amount of before-tax money and pay taxes on it (and following all the other IRA distribution rules, including early-withdrawal penalties as I am not yet at age 59.5).
When I spoke to the rollover specialist at the financial institution that holds my IRA (the destination for this money), he told me that the rules had changed for 2008, and that I had a third option:
3) Put the pre-tax portion of the 401(k) in a traditional IRA and the after-tax portion in a Roth IRA.
This option surprised me, as neither my wife nor I had found it when we were researching this issue. Nevertheless, the financial-institution guy was adamant. So I called the IRS.
I reached a customer-service representative at the IRS who told me that the financial-institution guy was mistaken -- that indeed I could roll a 401(k) into a Roth IRA, but I would have to pay taxes on the entire before-tax part of the rollover. I responded that he had said that this was a rule change for 2008, and when I looked at the IRS publications, they were quite vague about the 2008 rules.
She put me on hold for a long time, and when she finally came back on the line, she told me that I was right, the financial-institution guy was right, and she had been mistaken. When I asked her where I could find official confirmation of this new policy, she said that the new forms hadn't been printed yet, but the new rule was a consequence of the ability to roll from a 401(k) directly to a Roth IRA.
I could find nothing in the IRS publications that hint of this change. I did find things in publication 590 that said that for 2008 one can roll a
401(k) into a Roth IRA, but that doing so is treated as if it were first rolled into a traditional IRA and thence to a Roth IRA -- which I think would be a taxable event.
So my question is: Can anyone point me at an official source online that describes this 2008 rules change? If the financial-institution guy is correct about the change, this is a Very Big Deal for anyone with after-tax contributions in a 401(k).
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