Mechanics of In-Service Distribution/Rollover (Schwab)

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Topic Author
TetrisCollider
Posts: 191
Joined: Sun Nov 18, 2018 2:03 pm

Mechanics of In-Service Distribution/Rollover (Schwab)

Post by TetrisCollider »

I am planning on performing (for the first time) an In-Service Distribution/Rollover from my work 401K (non-Roth) of After-Tax portion to my Roth IRA (Schwab brokerage). The process of actual distribution involves my 401K Plan Provider cutting two separate checks made out to Schwab FOB "my name". One check is for Taxable Amount (from which Federal taxes will be withheld) and the other check is for Nontaxable Amount.

My question is as follows - I am planning to rollover BOTH of these checks into my Roth IRA account. Is this correct? Or one of them cannot be rolled over into a Roth IRA (and if so, which one)? I could not find an answer to this question from either my 401K plan provider or Schwab CR.

Thanks in advance for your help.
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Alan S.
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Joined: Mon May 16, 2011 6:07 pm
Location: Prescott, AZ

Re: Mechanics of In-Service Distribution/Rollover (Schwab)

Post by Alan S. »

TetrisCollider wrote: Thu Sep 16, 2021 1:37 pm I am planning on performing (for the first time) an In-Service Distribution/Rollover from my work 401K (non-Roth) of After-Tax portion to my Roth IRA (Schwab brokerage). The process of actual distribution involves my 401K Plan Provider cutting two separate checks made out to Schwab FOB "my name". One check is for Taxable Amount (from which Federal taxes will be withheld) and the other check is for Nontaxable Amount.

My question is as follows - I am planning to rollover BOTH of these checks into my Roth IRA account. Is this correct? Or one of them cannot be rolled over into a Roth IRA (and if so, which one)? I could not find an answer to this question from either my 401K plan provider or Schwab CR.

Thanks in advance for your help.
There is no federal withholding required for a direct rollover, including rolling the gains in the after tax sub account to your Roth IRA. If the amount of gain is fairly small, it is recommended to roll the entire after tax account balance to your Roth IRA, as you are planning. That avoids possible foul ups of splitting the rollover with the gains going to your TIRA.

The direct rollover check should be payable specifically to "Charles Schwab FBO (your name) Roth IRA". This nearly eliminates the risk that Schwab deposits it in a TIRA or even a taxable account. That type of error is very difficult to correct.

While these amounts can legally be rolled to your TIRA, that would be a big mistake since it would require reporting the new basis in your TIRA on Form 8606 and would probably subject you to pro rating indefinitely.

In short, use a direct rollover, and there should be no withholding taken out. Have the checks payable to your Roth IRA per above. They will probably mail you the direct rollover check to forward to Schwab. When you receive the check, make a copy of it and check that the payee is correctly stated.

You will get a 1099 R in January coded G to report the direct rollover. The earnings included will show in Box 2a and you will have taxable income of the 2a amount to report on line 5b of Form 1040.

It is rare that your plan would want to issue two checks when all the funds are going to your Roth IRA. But that is OK as long as they are both payable to your Roth IRA as indicated above. Again, the payee you indicated is for a direct rollover, not a distribution to you.

Finally, when you request the direct rollover check, be sure you are clear that you are only requesting that the after tax sub account be distributed, no other portions of the plan.
Topic Author
TetrisCollider
Posts: 191
Joined: Sun Nov 18, 2018 2:03 pm

Re: Mechanics of In-Service Distribution/Rollover (Schwab)

Post by TetrisCollider »

Alan S. wrote: Thu Sep 16, 2021 3:35 pm
TetrisCollider wrote: Thu Sep 16, 2021 1:37 pm I am planning on performing (for the first time) an In-Service Distribution/Rollover from my work 401K (non-Roth) of After-Tax portion to my Roth IRA (Schwab brokerage). The process of actual distribution involves my 401K Plan Provider cutting two separate checks made out to Schwab FOB "my name". One check is for Taxable Amount (from which Federal taxes will be withheld) and the other check is for Nontaxable Amount.

My question is as follows - I am planning to rollover BOTH of these checks into my Roth IRA account. Is this correct? Or one of them cannot be rolled over into a Roth IRA (and if so, which one)? I could not find an answer to this question from either my 401K plan provider or Schwab CR.

Thanks in advance for your help.
There is no federal withholding required for a direct rollover, including rolling the gains in the after tax sub account to your Roth IRA. If the amount of gain is fairly small, it is recommended to roll the entire after tax account balance to your Roth IRA, as you are planning. That avoids possible foul ups of splitting the rollover with the gains going to your TIRA.

The direct rollover check should be payable specifically to "Charles Schwab FBO (your name) Roth IRA". This nearly eliminates the risk that Schwab deposits it in a TIRA or even a taxable account. That type of error is very difficult to correct.

While these amounts can legally be rolled to your TIRA, that would be a big mistake since it would require reporting the new basis in your TIRA on Form 8606 and would probably subject you to pro rating indefinitely.

In short, use a direct rollover, and there should be no withholding taken out. Have the checks payable to your Roth IRA per above. They will probably mail you the direct rollover check to forward to Schwab. When you receive the check, make a copy of it and check that the payee is correctly stated.

You will get a 1099 R in January coded G to report the direct rollover. The earnings included will show in Box 2a and you will have taxable income of the 2a amount to report on line 5b of Form 1040.

It is rare that your plan would want to issue two checks when all the funds are going to your Roth IRA. But that is OK as long as they are both payable to your Roth IRA as indicated above. Again, the payee you indicated is for a direct rollover, not a distribution to you.

Finally, when you request the direct rollover check, be sure you are clear that you are only requesting that the after tax sub account be distributed, no other portions of the plan.
Alan, thanks for your response and verification. Going through the various screens of the Distribution in my plan, Federal Withholding is being shown (approximately 24% of the Taxable Amount). I have no choice not to take it.
For some reason, people that know nothing, seem to know everything...
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