After-tax rollover to Roth IRA

Submitted by Renee Grey on Thu, 2016-04-07 17:53

I recently retired and have after-tax contributions held inside my 401k. As I understand it, I can rollover the pre-tax to an IRA and the after-tax to my Roth IRA.

I would like to rollover all but $20k of the after tax monies. I’m only 58 years old and have a Roth that was first established in 2014.

I’d like to know what the easiest/cleanest way to go about keeping the $20k. Would it be to deposit the entire after-tax check into my account and then cut a check to my Roth IRA within 60 days? Or I could deposit the entire after tax check into my Roth and withdraw $20k, but I believe that would have some tax reporting. Is there another or better way I should be considering?

Thanks in advance.



Submitted by Alan - IRA critic on Thu, 2016-04-07 18:02

  • You could either have the entire after tax amount distributed to you and then roll the portion you wanted to your Roth IRA, or you could request direct rollovers of the pre tax amount to a TIRA, the after tax amount less 20k to your Roth IRA, and the 20k to you personally. Either will work  per Notice 2014-54, but you need to be very specific when making the distribution request, and it should be made as stated in the prior sentence. Generally, you avoid mentioning dollar amounts, but if you want 20k sent to you, then you will have to include dollar amounts in the request.
  • Your last option would work, but you must be aware of how a Roth distribution would be taxed under the ordering rules that are applied before your Roth IRA is qualified. For example, if your Roth IRA was funded by a taxable conversion less than 5 years ago and you withdrew 20k from the Roth IRA, it would be the older conversion money distributed and you owe a 10% penalty on that distribution. But if you had at least 20k of regular Roth contributions in your Roth IRA, then they would come out first without tax or penalty and this approach would work. You would have to report the distribution on Form 8606 and would have to know the current balance of your regular contributions and perhaps also conversions if you make this withdrawal before the Roth is fully qualified. After it is qualified, you no longer need an 8606 and the detailed accounting to complete it.


Submitted by Renee Grey on Fri, 2016-04-08 00:50

Thank you for the extra insight on the last bullet, as my Roth IRA was indeed started with a conversion in 2014.  So knowing that, I won’t be rolling the after tax over and then making the $20k withdrawal.As long as it’s not an issue to deposit the initial check into my bank account and then write a check to my Roth IRA for the remaining after tax, then I’ll puruse that route.  Thanks again.



Submitted by Renee Grey on Tue, 2016-04-12 14:32

Just curious. Will the indirect transfer rules apply to this situation, meaning if I take hold of the after tax funds and then write a separate check to my Roth IRA within 60 days, will that fall under the rules where I can only take hold of funds from any IRA once within 365 days without creating a taxable situation?



Submitted by Alan - IRA critic on Wed, 2016-04-13 02:27

Not a problem, because the one rollover limit per 12 month period only applies to IRA to IRA rollovers (except conversions). Since your rollover is from a non IRA account, there is no one rollover limit.



Submitted by YORK WONG on Thu, 2016-05-19 17:50

If I choose not to withdraw any after-tax contributions in an IRA account, does RMD rule apply?  In othrer words, RMD apply to the after-tax nondeductible IRA account?Thanks.



Submitted by Alan - IRA critic on Thu, 2016-05-19 20:28

RMD rules apply to the entire account balance, whether pre tax or after tax. Therefore, the amount of the RMD is not affected by an after tax balance, but the taxable amount of the RMD is reduced by the calculations done on Form 8606. This eliminates any double taxation of RMDs or other distributions from the IRA. You cannot choose to withdraw only pre tax or after tax amounts, as you will receive a pro rated amount of each per Form 8606.



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