2018 rules for in service dsitribution of aftertax 401k to roth

Submitted by Whodiini on Sat, 2018-01-06 16:24

This is a 3 part question:

1. Clarification needed for an in service distribution of aftertax 401k to roth conversion: I maxed out my aftertax 401k contribution in 2017 as well as the pretax portion. I would like to take an in service distribution of the aftertax portion of the 401k and roll it into a roth. My question is whether I can just take the aftertax contribution and roll that to a roth or i need to take out the earnings on that as well and pay tax and penalty on the earnings portion. In other words, what is the correct way to do this.

2. Does it matter if some of the aftertax contributions came before 2017? There is a small amount before 2017 I can leave, or if it is easy, I can put out as well?

3. Has the rules changed in 2018? If I was smarter, I would have done this in 2017 before the new tax laws came into effect.

Thanks

Warren



Submitted by Alan - IRA critic on Sat, 2018-01-06 19:50

  • Most people just convert the entire after tax account balance since the earnings on that balance are usually a small amount. The earnings must come out along with the after tax balance. However, if the earnings are enough to warrant doing a split rollover to avoid current taxes, you could request a split rollover with the after tax amount (entire after tax balance including prior years) going to your Roth IRA and the earnings to a traditional IRA.
  • This strategy was not affected by the new tax bill, except that you cannot recharacterize the Roth rollover any longer. However, since most of these rollovers are non taxable or mostly non taxable there is seldom a need to recharacterize them. Be sure to know the breakdown of earnings and contributions in the after tax account before requesting the rollover though since the rollover is permanent.

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