401K after Tax conversion to Roth IRA

Submitted by Paul Jerz on Fri, 2014-11-07 18:21

I have read about the change by IRS to allow for after tax money in a company 401K to be converted to a Roth. I currently have about 40,000 after tax dollars in my 401K , 30,000 via contributions and 10,000 by earnings. I have not been able to contribute to a Roth due to limits on income. I would like to take advantage of this ruling and start a Roth . I am 51 and would retire earliest at 55 . My 401K is with TROWE I don’t currently have a Roth IRA. Can I now setup a Roth IRA with TROWE and take advantage of this ruling and move the entire 40000 into the new Roth IRA directly without any tax implications ?? I will still remain in my 401K plan and continue to contribute. OR do I need to wait until I leave my company to take advantage of this ruling and do the conversion then?? My thought is I would like to take advantage of this Now and set up the Roth IRA before any change to the IRS rule could prevent it. Appreciate your help



Submitted by Alan - IRA critic on Fri, 2014-11-07 19:26

  • IF your company treats your after tax contributions as a separate contract (along with earnings on those contributions), you can probably request a single distribution at this time which would include two direct rollovers, the 30k being rolled to a Roth IRA after you establish it, and the 10k of earnings to a traditional IRA. This would be entirely non taxable. Conversely, if you rolled the entire after tax 401k sub account to your Roth IRA, you would be taxed on the 10k of earnings. The IRS Notice 2014-54 allows you to split up your direct rollovers like this. Otherwise, just doing a total single direct rollover has been allowed since 2008.
  • Ask your plan administrator if the two rollovers can be done now, and if not now perhaps after 1/1 the plan will allow that. It probably will, but just because the IRS says this is OK, the plan still is allowed to be more restrictive. If you can do these twin rollovers, it is a no brainer to act ASAP.

Submitted by Paul Jerz on Fri, 2014-11-07 21:12

Appreciate your feedback.I  Worked with TROWE and made this happen today. Great opportunity

Submitted by sydney p on Mon, 2014-12-01 04:23

Alan, thanks for your great assistance.  I have a question on gains with after-tax contributions to make sure that I understand this correctly.  To keep things simple (especially for me!), let’s use a situation where a person puts in a $10,000 after tax contribution into their 401k, and makes $10,000 in earnings.  Let’s also this person starts the after tax contribution at age 55.Is it correct to say:1)  After making the contribution, the person would immediately execute a Roth conversion of the funds within the plan (provided the plan documents permit).  If converted to Roth immediately, provided the funds remain in the plan for 5 years and the individual is over the age of 59 1/2, they could take distributions on initial contrition and gains tax free?2)  Using same example, individual has converted to Roth and after 5 years, rollsover the after tax contribution and gains to a Roth IRA.  Correct to say that the individual could then take out distributions on basis and gains tax free?I am getting confused with this, but I was believing that if the funds are converted to Roth and meet the Roth requirements (e.g, 5 years, 59 1/2), then contributions and gains will come out tax free.  And, if it makes it easier for me to understand : ) I would be starting by: 1) making an after tax contribution, 2) converting to Roth immediately, 3) wanting to take out distributions tax free (with the assumption that i have met the 5 year and 59 1/2 rules)….I could take the distributions from the 401k or rollover (eventually) to a Roth IRA…provided I am clsoing down the business and 401k.Thank you so much.

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