Can a 401(k) account be segregated into 2 IRA accounts for the purposes of segregating the pre-tax and after-tax dollars?

[Guest need help]

Can a 401(k) account be segregated into 2 IRA accounts for the purposes of segregating the pre-tax and after-tax dollars?

[GBurns]

For what purpose and Why? Is this a rollover, a transfer or what?

Why can't the same thing be accomplished within the current investment vehicles in the 401(k)?

[Guest need help]

To be rolled over from a QP into 2 separate IRAs, one consisting of pre-tax funding and the other for after-tax funding.

[Guest hyper]

You can do what you want if the 401(k) Plan distributing the assets permits. My experience is most plan documents do not permit a rollover into two different IRA's.

Even if the 401(k) plan only permits a rollover to one IRA you could always transfer the before tax portion of the IRA to another IRA after the 401(k) distribution is complete.

[Guest need help]

Thanks very much.

[KJohnson]

You can't rollover the after-tax contributions. From the regs:

:Q-3: What is an eligible rollover distribution?

A-3: (a) General rule. Unless specifically excluded, an eligible

rollover distribution means any distribution to an employee (or to a

spousal distributee described in Q&A-12(a) of this section) of all or

any portion of the balance to the credit of the employee in a qualified

plan. Thus, except as specifically provided in Q&A-4(b) of this section,

any amount distributed to an employee (or such a spousal distributee)

from a qualified plan is an eligible rollover distribution, regardless

of whether it is a distribution of a benefit that is protected under

section 411(d)(6).

(b) Exceptions. An eligible rollover distribution does not include

the following:

(1) Any distribution that is one of a series of substantially equal

periodic payments made (not less frequently than annually) over any one

of the following periods--

(i) The life of the employee (or the joint lives of the employee and

the employee's designated beneficiary);

(ii) The life expectancy of the employee (or the joint life and last

survivor expectancy of the employee and the employee's designated

beneficiary); or

(iii) A specified period of ten years or more;

(2) Any distribution to the extent the distribution is a required

minimum distribution under section 401(a)(9); or

(3) The portion of any distribution that is not includible in gross

income (determined without regard to the exclusion for net unrealized

appreciation described in section 402(e)(4)). Thus, for example, an

eligible rollover distribution does not include the portion of any

distribution that is excludible from gross income under section 72 as a

return of the employee's investment in the contract (e.g., a return of

the employee's after-tax contributions), but does include net unrealized

appreciation.

[FundeK]

I thought EGTRRA now allows the rollover of after tax?

[KJohnson]

You are right, I spaced out there for a minute...

[david rigby]

spaced out

Is that the technical term?

[FundeK]

Can a 401(k) account be segregated into 2 IRA accounts for the purposes of segregating the pre-tax and after-tax dollars?

Sure, why not.

My experience is most plan documents do not permit a rollover into two different IRA's.

Really? Why not? I would have to say that my experience is that most plans allow rollovers into multiple IRAs. I personally haven't seen the money segregated based on tax status, but I don't see why that would be difficult. It may cost the participant (or plan, depending on who pays) an additional amount if more than one check is required.

[jevd]

The IRS looks at all IRAs of an individual as one arrangement. The distribution rules and calculation of taxable amounts is determined using form 8606. It doesn't matter where the distribution comes from. I don't see the point of segregating taxable and non-taxable amounts. Am I missing something?

[mbozek]

Does establishing 2 IRAs really matter? I thought that withdrawals from any IRA would taxed in proportion to amounts of pre tax and after tax amounts in all IRAs maintained by the participant.

[jevd]

MBOZEK

Thats what I'm saying. There is really no point.

[FundeK]

mbozek and jevd - I understand that it isn't practical, but can it be done?

[jevd]

One could have two IRAs with the amounts segregated initially by the amount of taxable and non-taxable $ in the original distribution from the QP. However, once in the IRA, the distribution rules ( see form 8606 previously mentioned) would dictate the taxable and non taxable portion regardless of the account the distribution is taken from.

I used to get this question all the time when dealing with non-deductible IRAs before the ROTH IRA was introduced. Many people would set up small non-deductible IRAs and also have a very large Rollover account. The non-taxable % was almost insignificant but with each distribution had to be recalculated taking into consideration all IRAs of the client.

Edited for Typos