After Tax money in 401-K rollover to Roth IRa

Submitted by pat parkin on Thu, 2018-11-08 15:02

Can after tax money be rolled over to a Roth IRA and be excused from any penalty if distribution is made form the Roth immediatey.

Trying to Clarify

Permalink Submitted by Alan - IRA critic on Thu, 2018-11-08 15:49

Yes. A Roth rollover of after tax contributions (from a qualified plan) or a Roth conversion (from non deductible TIRA contributions) is non taxable when converted. When such conversions are distributed from the Roth IRA under the ordering rules (after regular Roth contributions and older conversions), there is no 10% penalty on the non taxable portion of the conversion that could well be all of it. That said, if the conversions include some gains in the after tax sub account in the 401k before the Roth rollover is completed, those gains are taxable when the rollover is done. Later when that Roth rollover is distributed, the taxable portion of the rollover are deemed to come out first, before the non taxable part. That taxable part would incur the 10% penalty if the Roth IRA distribution came in the first 5 years from the rollover year.
Example: Typical “mega back door Roth” from after tax contributions to the 401k. You contribute 10,000 and then as the plan allows execute a direct rollover to your Roth IRA. By the time the rollover is done, the 10,000 has grown to 10,400. The Roth rollover of 10,400 includes 400 of taxable income. Later if you distribute that rollover from the Roth IRA within 5 years, the 400 comes out before the 10,000 and you would owe 10% on the 400, or $40.