After Tax contributions to 401k
Using a 401k that allows after tax contributions and in service distributions prior to 59 1/2 or separation from service:
After rolling over these after tax contributions to a Roth IRA, may you access these non-qualified dollars prior to 59 1/2 or 5 years without any penalty or taxation? Of course the gains in the Roth IRA are qualified and cannot be.
Thank you, Mike
Permalink Submitted by Alan - IRA critic on Fri, 2018-12-14 21:04
You will have to distribute gains on the 401k after tax contributions along with the contribution amounts. Usually the gains are small and most people do a direct rollover of both the contributions and the gains to their Roth IRA, paying tax on the gains. Once in the Roth IRA this rollover (conversion) is treated like any other Roth IRA conversion. There is a 5 year holding period for conversions to avoid the 10% penalty on the TAXABLE amount of the conversion when withdrawn. Under the Roth IRA ordering rules, if your withdrawal is large enough to tap the rollover, the first dollars of the rollover distributed are the the taxable portion. The taxable portion (gains) is subject to penalty for the first 5 years if you are not yet 59.5. The non taxable portion is not subject to the penalty. For example, if you made 5000 of after tax contributions that is worth 5500 when you do the direct rollover, and then you distribute that 5500 from the Roth IRA prior to 5 years, you will owe the 10% penalty on 500 ($50), but not on the 5000.
Permalink Submitted by Michael Franklin on Fri, 2018-12-14 23:05
Thank you Alan,Yes, the tax deferred gains (if any) must come out with the after tax contributions, however the tax deferred gains are rolled over to an IRA and 100% of the After tax contributions are rolled over to the Roth IRA. In your example: 5000 went to the Roth, all after tax contributions, and 500 went to the IRA, 100% pre-tax.My question is: Is the 5000 accessible prior to 59 1/2 or 5 years without tax or penalty? I beleive that it is.Thanks again, Mike
Permalink Submitted by Alan - IRA critic on Fri, 2018-12-14 23:09
Yes, with only the after tax amount going to the Roth, that rollover can be distributed without tax or penalty anytime subject to the usual Roth IRA ordering rules.