Convert Prior After-Tax Contributions to Roth within Qualified Plan

[Guest RJRogers]

Employer's qualified plan permits Roth accounts. Participant, who is under age 59½ and has an AGI well in excess of $100,000, has made substantial after-tax contribution to the plan in prior years. Is it feasible to convert these prior contributions and accumulated investment income to Roth within the plan? If so, is it necessary to file an 8606 form and/or what records should be maintained with respect to the transaction?

[Appleby]

No. There is a Bill, that would allow such a conversion if it becomes law. As of now, moving funds from a traditional 401(k) to a Roth 401(k) is not permissible, even within the same plan.

[Guest RJRogers]

No. There is a Bill, that would allow such a conversion if it becomes law. As of now, moving funds from a traditional 401(k) to a Roth 401(k) is not permissible, even within the same plan.

But the existing contributions were made with after-tax dollars, not income deferrals. Does that make a difference?

[GMK]

See the right hand column of the rollover chart on page 2 of Mr. Lesser's pdf:

http://benefitslink.com/boards/index.php?showtopic=43682

(to borrow a phrase) hope this helps.

[Borsley]

No. There is a Bill, that would allow such a conversion if it becomes law. As of now, moving funds from a traditional 401(k) to a Roth 401(k) is not permissible, even within the same plan.

But the existing contributions were made with after-tax dollars, not income deferrals. Does that make a difference?

But they were not made as Roth(k) contributions so there would need to be a means to convert to Roth(k) money (which there currently is not).

[Guest RJRogers]

I hoped there might be an easy way out but now it becomes more difficult. Contributions were actually made to a 401k profit sharing plan maintained by an LLP. Partner executed an elective deferral agreement and additional profit sharing contributions were added to his account up to allowed annual combined maximum. However, annual K-1 statements never reflected either amounts and partner's accountant never took amounts into account in figuring AGI. Consequently, all amounts contributed have de facto been after-tax. Amended returns will be filed for open years. Problem is: what to do about prior years in an effort to avoid double taxation when distributions occur?

[Bird]

While they might have effectively been after-tax due to the improper filings, I don't think the plan can treat them that way, especially if the plan didn't permit after-tax contributions, which is probably the case. I think you're doing all that is possible by amending the open returns to claim the deductions.

(But it's a good creative thought...)

[Guest RJRogers]

Does anyone have an opinion regarding the (im)possibility of achieving a fair resolution (i.e., partial or full avoidance of double taxation) of the issue through discussion with the IRS.

[K2retire]

Amend the tax returns on which it was claimed as taxable income.

[Guest RJRogers]

Amend the tax returns on which it was claimed as taxable income.

Solves the problem for open tax years (2006-2008) but 'what to do about years prior to that' is the problem.

[mbozek]

Amend the tax returns on which it was claimed as taxable income.

Solves the problem for open tax years (2006-2008) but 'what to do about years prior to that' is the problem.

There are two different issues:

1. The contributions by the partner and the employer are treated as pre tax under the terms of the plan, so the distributions will be treated as taxable when received.

2. Both types of contributions are reported as taxable income on the partners K-1 and the partner must claim the deduction on the 1040. As noted the s/l for amending returns to claim the deduction is 3 years. The problem for the partner is that the contributions prior to 2006 are considered to be pre tax on the plan's records if they were contributred as pre tax under the terms of the plan. The failure by the partner to claim the deduction on his 1040 is not an error which can be corrected in the plan's records. Its no different than a participant who fails to remove excess 401k elective contributions to two plans by 4/15. The excess funds will be taxed again at distribution.

[Guest RJRogers]

" ... Its no different than a participant who fails to remove excess 401k elective contributions to two plans by 4/15. The excess funds will be taxed again at distribution. "

I guess it must be regarded as a penalty the second time around since, if it were to be a second federal income taxation of the same income, wouldn't it violate the general prohibition against "direct double taxation?"