Thread: New: Withdrawal/Tax-exempt/Roth-Ira question

Wow: 130 views in one month and no replies. Must be a tough question!

I found the following possible approach at Fairmark.com, Isolating 401k Basis for a Conversion:

First, take all your money from the 401k account in a single distribution. Second, put an amount equal to the pre-tax dollars into a traditional IRA. And third, after the partial rollover to the traditional IRA has been completed, put an amount equal to the after-tax dollars into a Roth IRA, making sure you complete this step within 60 days of the distribution.

However, this would require me to make up the 8K of withholding (20% of the taxable 40K) in the second step.

--------------------

Follow-up question related to my original post:

1) Roll over the entire TSP into my new employer's non-Roth 401(k), which does not accept tax-exempt balances. Therefore, my new 401(k) will receive 40K and I will automatically be sent the remaining 10K.

My understanding is that there would be two Forms 1099-R (IAW page 3 of the 2009 IRS instructions for 1099-R and 5498, "If part of the distribution is a direct rollover and part is distributed to the recipient, prepare two Forms 1099-R.":

For the 40K direct rollover:

Box 1: 40K
Box 2a: 0
Box 4: 0
Box 5: 0
Box 7: code G

For the return to me of the 10K tax-exempt balance:

Box 1: 10K
Box 2a: 0
Box 4: 0
Box 5: 10K
Box 7: code 1

I think that my original approach is still good if the Forms 1099-R look like I laid out (since the second Form 1099-R would become my license to place the 10K in a rollover IRA with 10K in basis).

For anyone that has done this, do the Forms 1099-R look like this? If not, what do they look like?

Thanks

I called the TSP Thriftline. After an hour back and forth on hold with a very patient representative as she checked things out, she verified that given the scenario I laid out, I would get two Forms 1099-R as I listed in my previous post.

Code:

                                Box 1  Box 2a  Box 4  Box 5  Box 7
For the 40K direct rollover:      40K     0       0      0      G
For the return to me of the 10K:  10K     0       0     10K     1

So my course of action is (slight change from the original):

1) Transfer (i.e. direct rollover) the entire TSP into my new employer's standard 401(k), which does not accept tax-exempt balances. Therefore, my new 401(k) will receive 40K and I will automatically be sent a check for the remaining 10K.

2) Within 60 days, place the 10K in a rollover IRA with 10K in basis.

3) File an IRS Form 8606 with my 2009 taxes. IAW Form 8606 instructions for line 2, making sure that line 2 (total basis in traditional IRAs) reflects the sum of line 14 (total basis in traditional IRAs for 2008 and earlier) of my 2008 Form 8606 and the 10K in basis.

4) In 2010, because of the lifting of the MAGI test for conversions, roll the rollover IRA into a Roth IRA (owing taxes only on any value above my 10K in basis).

To answer my original questions:

Questions:

1) Am I correct in assuming that my only taxable event will be the taxes owed on whatever value the traditional IRA has over 10K when I roll it over to the Roth IRA? (I realize that the answer would be different if I had any traditional IRAs with deductible contributions; but I don't.) Correct

2) In general what is the status of tax-exempt contributions returned to the service member and what can you do with them in relation to IRAs? (For some reason, I have never seen this addressed anywhere on the web despite extensive searching.) Tax-exempt contributions are treated the same as after-tax contributions, i.e. you have basis in them and can do anything with them that you can do with any withdrawal from a 401(K)

Disclaimer: I am neither a lawyer nor a tax advisor. If you plan to act on this information you should call the TSP and confirm it for yourself.

Ret21

Welcome Ret21! I moved your posts here. It might get more views and responses.

I'm curious:

If you don't need the money today- what is the reason for moving it over to a Roth? Do you think you can do better in the fund that you are going to? Are you planning on very actively managing it in individual stocks, rather than in an index fund like the TSP offers?

Just asking......

Originally Posted by James48843

I'm curious:

If you don't need the money today- what is the reason for moving it over to a Roth? Do you think you can do better in the fund that you are going to? Are you planning on very actively managing it in individual stocks, rather than in an index fund like the TSP offers?

Just asking......

Some experts expect that with current gov't spending, our taxes will be very high in the decades to come. Ed Slott, for instance, recommends converting to Roth ASAP.

Curious how the OP finished off these transactions.

I'm not sure what you are asking.