2010 Roth Conversion - In Service from 401(k)

[Lou S.]

Ok so I have this client with some interesting technical questions that I'm not sure of the answers on. The 401(k) plan allows for in-service distributions at age 59 1/2 so a participant (of age) can elect an in-service rollover to an IRA.

The questions I have are can they roll directly to ROTH-IRA now? I'm pretty sure that is now a simple yes under current law.

If they do roll directly to ROTH-IRA, can they elect to defer the taxes to 2011 & 2012 as they can under conversions? or is it all taxable in 2010?

If all taxable in 2010 under 1st option, can they roll directly to Traditional-IRA (in 2010) then convert to ROTH-IRA (also in 2010) and take advantage of the 2 year tax spread?

On a somewhat related note, since the conversion limits no longer apply after 2009, does that mean there is a loophole in the contribution limits for ROTH-IRA contributons? Effectively you can make a non-deductible IRA contribution for 2009 (on say 4/15/2010) and the immediately (say on 4/15/2010) convert your "2009 non-deductible traditional IRA contribution" to a ROTH-IRA. And you could keep doing this annually until the law changes. Am I missing something?

[GMK]

..., since the conversion limits no longer apply after 2009,

Still not true in Wisconsin.

http://www.dor.state.wi.us/taxpro/news/091030.html

[Guest jims]

Directly rolling to a Roth IRA is treated as a conversion. Conversions in 2010 default to taxable income in 2011 and 2012 unless taxpayer elects it as 2010 income.

The so called loophole does exist. Higher income taxpayers can make non-deductible contribution to traditional IRA then immediately convert to Roth IRA..........maybe not Wisconsin.

[Lou S.]

Thanks. Always fun to find out some quikry state law conflicts with federal law.

[txdd]

The "loophole" only works if the taxpayer has no other traditional IRA's. ALL traditional IRA's must be aggregated to determine the taxability of the Roth conversion from an IRA.

[Guest BruceC]

The "loophole" only works if the taxpayer has no other traditional IRA's. ALL traditional IRA's must be aggregated to determine the taxability of the Roth conversion from an IRA.

If my employer's plan is composed of 300,000 pretax dollars (pretax contributon and all plan earnings) and 100,000 of after tax contribution = total 400,000, is there a way to convert only the after tax contribution to the Roth....whether by direct or indirect rollover?

BruceM

[Guest jims]

here a link to an article about how to execute the rollover(s) to isolate the after-tax money for conversion. http://www.fairmark.com/rothira/09030801-401k-basis.htm

[Borsley]

..., since the conversion limits no longer apply after 2009,

Still not true in Wisconsin.

http://www.dor.state.wi.us/taxpro/news/091030.html

I was on an ACLI conference call today (unrelated matter). They mentioned the Wisconsin situation with Roth conversation but there was also mention that Wisconsin may not be the only state that hasn't adopted conforming law. Does anyone have any insight into other states that may fall into this category?

[mbozek]

..., since the conversion limits no longer apply after 2009,

Still not true in Wisconsin.

http://www.dor.state.wi.us/taxpro/news/091030.html

I was on an ACLI conference call today (unrelated matter). They mentioned the Wisconsin situation with Roth conversation but there was also mention that Wisconsin may not be the only state that hasn't adopted conforming law. Does anyone have any insight into other states that may fall into this category?

NJ and PA.