401k After Tax Contribution Withdrawal
If a plan participant rolls a 401k company plan over and creates an IRA if the custodian sends two (2) checks, one for the rollover amount (pre-tax)and one a return of “After Tax” contributions, does the plan participant face the 10% IRA penalty if he uses these funds for personal use?
Permalink Submitted by Alan Spross on Mon, 2008-12-15 18:48
No.
The early withdrawal penalty only applies to taxable amounts. not to after tax amounts.
If he does not need the full after tax amount for personal needs, he can roll the balance over to a Roth IRA if his modified AGI is not over 100,000. This would essentially be a tax free conversion to a Roth, and a wise decision if he does not need the full after tax amount.
That said, if this is his only Roth IRA, and he needs to take conversion money out before 5 years have passed, he will then owe the 10% early withdrawal penalty if he is under 59.5.