After-tax distribution
Is there a method available that permits an individual to just remove after-tax funds from a 401(k) or pension plan? The only way to get out all of the after-tax funds is by also rolling over all of the pre-tax funds to a TIRA?
Permalink Submitted by Alan - IRA critic on Thu, 2015-02-12 18:59
If the account has an after tax sub account, in service distributions can usually be made from the sub account only but that would include the earnings on the after tax contributions. Otherwise you are correct. Under Notice 2014-54 a taxpayer can also receive a check for the after tax balance if doing a direct rollover of the pre tax balance at the same time, but these distributions must be allowed per plan provisions. You could not receive the after tax amount by itself and leave everything else in the plan EXCEPT for amounts that were pre 1987 after tax contributions.
Permalink Submitted by Peter Thomann on Fri, 2015-02-13 02:03
Thank you Alan.
Permalink Submitted by Peter Thomann on Fri, 2015-03-13 11:11
What would the tax consequences be if an individual was not permitted to remove all of their contributions as per the plan document. For example, a DB plan member has $100,000 of contributions in the plan consisting of $80,000 pre-tax and $20,000 post-tax. Upon retirement wants to rollover his contributions, but is required to leave 5% of contributions in the DB plan. In this example, is it possible to roll the $20,000 after tax to a Roth IRA and the $75,000 to an IRA? Would a portion of the $20,000 rolled to the Roth IRA be taxable? If yes, what portion would be taxable?
Permalink Submitted by Alan - IRA critic on Fri, 2015-03-13 18:20
Whatever amount is eligible for distribution can be directed to the appropriate IRA types, pre tax amount to TIRA and post tax amount to the Roth. Notice 2014-54 would apply in this situation regardless of how much of the plan balance was not eligible for distribution.
Permalink Submitted by Peter Thomann on Mon, 2015-03-16 13:58
Ok. Still confused about the pro-rata rule and when it applies. If an individual requests a distribution of pre-tax and post-tax and “leaves behind” money that is eligible for rollover would the individual be subject to the pro-rata rule on the distribution?
Permalink Submitted by Alan - IRA critic on Mon, 2015-03-16 17:42
The plan provisions determine which portions of the plan balance are eligible for distribution. If that balance includes both pre tax and post tax amounts, then the distribution is pro rated between the two (some exceptions apply such as pre 1987 after tax contributions). But this does not matter if the individual can direct the pre tax amount to a TIRA and the post tax amount to a Roth IRA. In other words, the amounts come out pro rate, but the individual does not have to send equal pro rated amounts to each IRA type. This is what Notice 2014-54 does, allows the individual to direct the entire post tax amount to a Roth IRA. Put another way, the Notice does not affect what comes out of the plan, but it does provide the individual with control over where these amounts can be rolled.
Permalink Submitted by Peter Thomann on Thu, 2015-03-19 09:33
Thank you Alan it makes sense now. One final question, is an individual permitted to rollover the after-tax portion to a Roth IRA if he/she receives the money directly? For example, an individual has $100,000 in a retirement plan consisting of $80,000 pre-tax and $20,000 after-tax and has the plan administrator directly rollover the $80,000 to an IRA and receives the $20,000 paid to himself via a check. Can the individual use the check to fund a Roth IRA? Or does the funding of the Roth IRA have to be done via a direct rollover?Thank you.
Permalink Submitted by Alan - IRA critic on Thu, 2015-03-19 15:33
Yes, the individual can roll the 20k over to a Roth IRA tax free within 60 days as long as the entire 100k distribution was requested at the same time.
Permalink Submitted by Peter Thomann on Thu, 2015-03-19 15:41
Ok, thanks for the help Alan!