Contributions, calculations, conversions… oh my…

Submitted by Amar Patel on Sat, 2012-04-07 20:33

I participate in both an IRA and a 401(k). The IRA actually started out as a trio of employer-sponsored retirement plans from an employer long ago (457, 401a, and annuity savings plan). I contributed in a little, and the employer contributed in a little. A few years after leaving that employer it finally occurred to me to rollover the plans to an IRA. A few years after that it finally occurred to me to convert the IRA to a Roth IRA.

In my 401(k), I started by making pre-tax contributions, and my employer matched a portion. And then after a while I stopped making pre-tax contributions and went to making only after-tax contributions. And my employer continued to match a portion of my contributions.

I guess the common theme here is that I eventually learned about Roth vehicles. I like them. But I’m still learning. Like, for example, the IRS treats distributions from a Roth differently depending on how funds went in I believe. Contributions are treated differently than gains/losses… and even conversions I think. This is where I’m getting confused.

Apparently after the Roths have been around for 5 years and I’m 59.5, then none of the above matters. All distributions are tax-free and penalty-free. But before then, if I ever have need for distributions, I wanted to differentiate all the types of monies in and out (contributions, conversions, gains, pre-tax, after-tax, etc.). I have some of my statements from the beginning… some I don’t. I’m tracking all those down now.

But I’m most confused about what to think of the employer’s contributions, at the beginning of the IRA path and the 401(k) path too. Are those treated as “my” contributions? Gains? Conversions? Something else?

And what about the pre-tax monies? How far back in time do I need those statements? On the IRA path, it was all converted to Roth and taxes were paid. Are they now counted as a contribution, free and clear now? After 5 years? Only after I’m 59.5 in age? To complicate matters, on the 401(k), my employer is now working with its 3rd plan provider… and no one seems to remember who the first provider was. So we don’t know who to ask for statements. Eventually, if I leave my employer, I had planned to roll the pre-tax and after-tax monies into separate IRAs and then convert the pre-tax to after-tax by paying taxes again.

But until then… got any suggestions on where to go from here?



Submitted by Alan Spross on Sun, 2012-04-08 02:43

There are two types of Roth IRA contributions, regular contributions and conversions. You need to keep track of the amount and years of each type. That will give you the information you need to report any non qualified distributions.

For the conversions, it does not matter whether you converted directly from the employer plan or first rolled the employer plan to a traditional IRA and then converted. These are all considered conversions, and you must hold conversions for 5 years to avoid a 10% penalty if you withdraw them, but your regular contributions are withdrawn before any of your conversions. Therefore you need to start by determining how much you have contributed as regular Roth contributions since 1998. These are not reported on your tax return, so you cannot tell by pulling up your old returns.

When you make a contribution, the custodian issues form 5498 for each year. If you kept these forms you would know how much you contributed. If you have kept the same Roth IRA custodian you might check with them to see if they can provide the information. If all else fails, you can request a copy of all your 5498 forms from the IRS. Once you get this balance, you also need to subtract any distributions that you took out. The same applies for conversions as regular contributions, ie Form 5498 or custodian records.

You are correct that none of this matters once you reach age 59.5 and 5 years from your first Roth contribution.



Submitted by Amar Patel on Mon, 2012-04-09 01:54

Thanks for the help, Alan. But what about the 401(k)? I have both pre-tax and after-tax monies in the 401(k), with gains associated with each type… and employer contributions too. Plus my employer is on its 3rd provider since I started participating. So all the last statement I have, from the most current provider, is a balance of “conversions in” for pre-tax, after-tax, and employer match. But it doesn’t seem to differentiate what that conversion is from… contributions, gains? The statement does tell me what was gained since the last provider took over by money type. Just not what the conversion in was built from.



Submitted by Alan Spross on Mon, 2012-04-09 03:38

It’s not clear what they mean by “conversions in”. Perhaps it is just funds transferred from a prior provider, and broken out. If you are interested in taking an “in service distribution” you need to find out how the accounts are set up. Many plans separate the after tax contributions and their earnings from the rest of the plan and allow you to take in service distributions of those assets, possibly for purposes of converting the after tax amounts to a Roth IRA without running them through your TIRA.

After you leave the company, the entire balance must be pro rated between pre and post tax amounts if you do direct rollovers, but you can separate these amounts if you do an indirect rollover where the entire balance is distributed to you and you do your own rollovers along with replacing the mandatory 20% withheld.

Once these amounts are in your Roth IRA, they are treated like Roth conversions, subject to 5 year holding etc.



Submitted by Amar Patel on Tue, 2012-04-10 22:46

My apologies but I’m not sure I totally followed that last post. But let me try again explaining what I see in my current provider’s statement and website. Maybe that helps move me forward in my understanding a little bit more.

I see 3 categories of balances within my 401(k). I see the following:

– employee before-tax
– employee Roth 401(k)
– employer match with vesting

Each category gives me two balances: a “balance” and “vested balance”. For the employee before-tax and employee Roth 401(k), the balance and vested balance are both the same. For the employer match with vesting, the vested balance is roughly 20% smaller (which makes sense because I remember being told I fully vest after 5 years, and I’m only 4.5 years in).

My employer’s controller showed me how to drill a little further into the employee Roth 401(k) balance to tease out what I’ve contributed over the years and what is considered gains on those contributions. I think that answers part of my questioning.

But I’m still not totally clear about the other two categories. Apparently both are considered “before tax” amounts. So I’ll pay taxes when I take distributions from those balances, and maybe even penalties if I’m not of retirement age or they’re not for special purposes. Right?

Additionally, does it even matter to track what is a before-tax contribution and gains on those specific contributions like it does for after-tax contributions? If not, and if my latest plan provider tracks the differences between Roth contributions and the gains on the Roth contributions, do I even need to go door to door to find out who my previous providers were and ask them to research for my statements and pull out what my contributions and gains were then?

I guess what I’m trying to drive at is, if ever needed for any reason in the future, in what order should I consider pulling those funds out from my 401(k)… and what records would be needed to justify my actions with the IRS to minimize as many taxes and penalties as possible?



Submitted by Alan Spross on Tue, 2012-04-10 23:14

I don’t know if it’s safe to assume that the current provider has correctly incorporated information from the prior providers, but if the current breakdown does that you will need additional information which the plan must provide to you.

It is not clear whether what you are looking at includes actual balances after gains or losses, or just the various amounts originally contributed. If it includes the current balances after gains and losses, you need a breakdown for the Roth portion but not the others since the other two categories are 100% pre tax.

It is also important to differentiate between after tax contributions and designated Roth deferrals. While both are after tax, they are treated and referred to differently. An after tax contribution not made to the Roth account would be another category so I will assume you don’t have any of those, just Roth deferrals and you should refer to them as Roth deferrals like the plan does. For these Roth deferrals, you would need to know how much you actually contributed and if the value is more, then these are gains in the Roth.

Company matching on Roth contributions is always made to the last category whehter the company is matching pre tax or Roth contributions you made. Therefore, the only additional info that you need is the amount you actually contributed to the Roth so you can see whether there are gains or losses included in the second category.



Submitted by Amar Patel on Wed, 2012-04-11 17:27

Thanks Alan, for the continued assistance. I think I’m following this along a little better. To confirm I am…

– You said “an after tax contribution not made to the Roth account would be another category”. If this is a reference to a “non-deductible contribution” for the purposes of a “backdoor Roth”, then no I do not believe I have such funds at this time. So what I do have must be “designated Roth deferrals”.
– The only place where knowing gains/losses versus contributions versus conversions-in is in a Roth account (IRA or 401(k). All the other monies are pre-tax and will be 1) taxed at distribution and 2) possibly penalized if circumstances warrant.
– To have everything in a Roth form eventually, I’m already done on the IRA side (converted a TIRA to a Roth IRA in 2009, and paid taxes then). For the 401(k), there is no “internal conversion” that my employer’s controller knew of. Instead it sounds like I must, at separation from the employer, take an indirect rollover. The taxes that are withheld must be paid back out of savings. And I must roll the pre-tax monies first to a TIRA and convert that. And then the Roth monies to the Roth IRA. And all of this must be done within 60 days of the start of the process.

Am I at least close here?

Thanks for the ongoing help!



Submitted by Amar Patel on Tue, 2012-05-01 20:20

After some weeks of research, I think I’ve puzzled through the remnants of the statements and other documents I have pertaining to my 401(k). It involved 3 plan administrators and many many phone calls. But I think I know what I contributed in the pre-tax and Roth deferral options. I’m assuming the difference between the balance on those two options and the contributions made into those two options are market gains/losses. I even know what the employer contributed and the gains associated with those. Is that all I need in order to justify early withdrawals tax-free and penalty-free, etc? Or do I need to be wary of anything else?



Submitted by Alan Spross on Tue, 2012-05-01 21:45

If you qualify to take any distributions from the plan while still working, the options depend on what the plan allows.

But the usual approach is to roll over the plans to an IRA after you leave the company. That usually means rolling the pre tax 401k account which includes all the company contributions and gains to a TIRA account and rolling the Roth 401k balance to a Roth IRA. Both can be done by direct rollover with no taxes withheld or taxes due. After that is done, IF additional Roth conversions make sense you can convert more from your TIRA to your Roth IRA.

I think you determined that your ONLY after tax contributions in the plan were the Roth 401k contributions, and if the Roth 401k is now worth more than your contributions you have gains in that account. These gains will become tax free once after 5 years from your first Roth 401k contribution AND you reach 59.5. If you then roll that balance over to your Roth IRA, the rollover is considered to be the same as regular Roth IRA contributions and you can therefore distribute them tax and penalty free anytime you wish.

Since your only after tax contributions to the employer plans were Roth 401k contributions, there is no need to be concerned with the complex tasks of trying to isolate any other after tax contributions to get them into your Roth IRA. That eliminates the most complex transactions.

Now, will you need to take distributions (if you even qualify for them) from the employer plan BEFORE you leave the company and roll the plans over to IRA accounts?



Submitted by Amar Patel on Wed, 2012-05-02 21:04

I likely do NOT need to take any distributions from the employer plan before leaving the company. I’m typically good with finances and am an excellent saver. But I have (known) expenses coming up, including the possible purchase of my first home. If that indeed comes to pass, I’d like to know what financing options I really should or should not tap in order to balance that desire for low-debt versus retirement funding, etc. That may seem obvious now but I typically take nothing for granted in any analysis I do on the job, so why take them for granted when my own finances are on the line?



Submitted by Alan Spross on Wed, 2012-05-02 22:20

If you are determining what amounts would be taxable for in service distributions, you would first have to find out which accounts and at what age you would be allowed to take such distributions. For example, you would not be allowed to distribute your own contributions (whether pre tax or Roth) before age 59.5 and probably not until you separate. If anything, you might be allowed to take out company matching contributions first, but those would be fully taxable upon distribution.

Note that you also probably have access to a 401k loan. Loans are not taxable unless you fail to pay them back when required. Loan interest is deposited back into your account.



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