After Tax Money from 401k

Submitted by Jack Thomas on Wed, 2014-12-17 19:05

Under the new rules, if a 401k owner wants to rollover a 401k that contains pretax and after tax money into separate accounts, the pretax into a TIRA and the after tax to Roth IRA, can they roll the earnings on the after tax money into a Roth and not pay taxes? Or, or would it just be the contributions?

And can they do that this year? Or do they have to wait until Jan 1 2015 when the rules take effect?

Thanks.



Submitted by Jack Thomas on Wed, 2014-12-17 19:14

And would it make a difference if the contributions were made prior to 1987?

Submitted by Alan - IRA critic on Wed, 2014-12-17 20:19

  • If after tax contributions were made prior to 1987 and tracked by the plan, it just means that they can be distributed separately from the rest of the plan. Participant could request that just the pre 87 after tax contributions be directly rolled into a Roth IRA and this would be tax free. That said, the only benefit of this would be to get those funds into a Roth IRA while leaving the rest of the plan in the 401k. Under Notice 2014-54, the participant can request that the earnings in the after tax sub account be rolled to a TIRA and all after tax contributions (pre or post 1987) be rolled to a Roth IRA, therefore there is usually no need to isolate the pre 87 contributions unless participant wants to leave as much of the rest of the plan as possible intact. A plan can act under the Notice now, but there are a few plans that may not want to accept the Notice until Jan 1.
  • If earnings or any other pre tax money is rolled to a Roth IRA, those pre tax amounts will be taxable. If participant would otherwise convert to a Roth that is OK, but the Notice allows the destination IRA accounts to be identified and if the earnings are sent to a TIRA, then there will be no current taxes.

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