After Tax 401k – Penalty for pre 59 1/2?
I’m getting different answers to this question so I thought I would ask the experts here:
1) Pre 59 1/2 client is rolling over 401k and about 15% of 401k is after tax
2) Client is considering taking after tax money in a check to him and rolling over remainder to Trad IRA
3) One of my references said he would pay penalty on the earnings of his after tax contriobutions due to the fact that he is not yet 59 1/2… how do we knwo the earnings?
4) What if any penalties could he be subject to? Would his 401k statement listing after-tax only include his contributions or contributions and earnings related to the after tax contributions?
I’ve confused myself I think on a pretty simple topic….
Permalink Submitted by Alan Spross on Mon, 2012-02-27 19:21
Client can keep the after tax amount and roll the pre tax amount to a TIRA as you indicated in step 2. There would be no tax or penalty to do this, because the earnings on the after tax contributions are included in the pre tax amount rolled to the TIRA account.
A 401k statement will typically show the after tax contribution amount separately and earnings would be in the pre tax amount.
Some plans offer in service distributions of after tax amounts that must include the earnings on those amounts. In that case, the earnings could still be rolled over to a TIRA to eliminate tax and penalty.
If a client does not have a current need for the after tax amounts, then the various strategies that allow the after tax amount to be converted to a Roth IRA while the pre tax amount goes to a TIRA come into play. 15% after tax might make this client a candidate for that.
Permalink Submitted by John Boardman on Mon, 2012-02-27 19:29
Thanks, we are considering all avenues but he may have a current need for the cash.