after vs pre tax $ in 401K
I was told that when rolling over a 401k one can slice out the after tax contributions separate from earnings. The pre tax $ must be rolled over into a new IRA vehicle, but the after tax portion can be cashed to the owner with no 10% early withdrawal penalty & without ordinary income tax. Is this so, & if so, (1) what is the correct code for the 1099R showing the after tax portion? (2) what IRS rule governs this one time event?
Permalink Submitted by Alan Spross on Thu, 2008-11-20 00:02
That is basically correct. The after tax amount would get a separate 1099R showing nothing in the taxable income box. This after tax amount could also be either transferred or rolled over to a Roth IRA tax free as long as the 100,000 income limit permits. The pre tax amount would be coded as a direct rollover to an IRA (Code G).
The following is a link showing how after tax amounts are separated for rollover purposes:
http://www.mhco.com/Library/Articles/2004/ARoll_Portability_080504.html
Permalink Submitted by C McDonald on Thu, 2008-11-20 01:58
Alan, I am confused. On a similar post from “Steve” on May 19th you seemed to say this money could only come out “pro-rated.”
On May 20th, 2008 you posted:
only pre 1987 after tax contributions can come out by themselves, tax and penalty free. The post 1986 after tax contributions can only come out pro rated with pre tax amounts.
Have I misunderstood something? If so, could you clarify? Thanks!
Permalink Submitted by Alan Spross on Thu, 2008-11-20 03:48
Yes, the difference is rollover vrs a taxable distribution. The prior post addressed a taxable distribution without a rollover (or should have).
The original poster here was asking about a rollover, where the pre tax dollars are deemed the first dollars rolled over. This would apply regardless of whether the after tax amounts were pre 1987 or not.
If an employee has pre 1987 after tax contributions in a plan and the plan separately accounts for them, they can be distributed before any pre tax funds, and would of course be tax free.
Permalink Submitted by Shannon Davis on Thu, 2008-11-20 12:33
Thanks for the reply – it was helpful. I still have a question about how the 1099R for the after tax dollars should be coded. In my case, I took the cash directly (did not rollover to a taxable retirement account) & my form was coded as 1 for early distribution with penalty. I don’t qualify for any of the exceptions noted in IRS pub 590, & my CPA is not familiar with this particular “rule” for IRA rollovers.