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Question about 2008 rollover from 401(k) to IRA

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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Reply to
Andrew Koenig
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I have been looking for similar rollover/conversion guidelines for

2008.

I decided to do the conversion (it is dated either 10/9 or 10/10 depending on when paperwork is received- I sent it Tuesday). My logic was that not sure of the 2008 AGI limits or my 2008 taxable income, but I can recharactorize the conversion back to a rollover IRA between now and April 15 without any tax consequence.

I think you will have to wait to much closer to Dec 31 to see the 2008 IRS pubs.

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Reply to
jIM

Here is what the IRS says: Rollovers from other retirement plans. Prior to 2008, you can only rollover (convert) amounts from either a traditional, SEP, or SIMPLE IRA into a Roth IRA. After 2007, you can rollover amounts from the following plans into a Roth IRA. a.. A qualified pension, profit-sharing or stock bonus plan (including a

401(k) plan),

b.. An annuity plan,

c.. A tax-sheltered annuity plan (section 403(b) plan),

d.. A deferred compensation plan of a state or local government (section

457 plan), or

e.. An IRA.

Any amount rolled over is subject to the same rules for converting a traditional IRA into a Roth IRA. See Converting From Any Traditional IRA Into a Roth IRA in chapter 1. Also, the rollover contribution must meet the rollover requirements that apply to the specific type of retirement plan.

NOTE: the last part of the above quote says it is subject to the same rules for converting a traditional IRA into a Roth. This means there is a monitary limit of $5000 or $6000, so you would not be able to move $50,000 into a Roth IRA. You could take it out, and if you have earned income in future years, you could increase the Roth IRA with new contributions.

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Reply to
JoeSixPack

This claim is incorrect on at least two counts:

1) There is no $5,000 or $6,000 limit on converting from a traditional IRA into a Roth. 2) I've already seen this paragraph, and I mentioned it to the IRS agent with whom I spoke. She said that it doesn't apply in this case, but was not able to explain why.

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Reply to
Andrew Koenig

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