After tax contributions in a 401k. Pro-rata rules apply?
Additional follow up on previous post. A client has a 401k balance of $1 million. Included in this $1 million balance is an after-tax contribution balance of $350,000 (itemized as follows: $100,000 represents after tax contributions or basis and the balance $250,000 represents earnings). From a previous post in this forum, I understand my client can rollover the $100,000 in contributions to a Roth IRA and the $250,000 in earnings to a traditional IRA. Do the pro-rata rules not apply since this is a 401k and not an IRA? You replied, “The distribution will require a pro rated portion of the after tax sub account balance only, but it’s allowed to split the rollover between a TIRA and a Roth IRA, which would be a non taxable split rollover per Notice 2014-54. What would not be allowed is a rollover of the after tax contribution to the Roth IRA while leaving the earnings in the plan.”
I appreciate the response, but wanted to be sure, that when you say, “What would not be allowed is a rollover of the after tax contribution to the Roth IRA while leaving the earnings in the plan”, I presume you’re referring to the earnings in this after-tax sub account. Is that right? In other words, yes, the pro-rata rules apply, but by draining the after tax account in total (the $100,000 in contributions AND the $250,000 in earnings on these after tax contributions, you’ve satisfied the pro rata rules and the rollovers to the Roth and Traditional IRAs will be non-taxable. Is that right? Thanks Alan.
Permalink Submitted by Alan - IRA critic on Mon, 2025-03-31 11:14
Yes, was referring to pro rata of the after tax account only. Typically, the participant requests the split rollover making it clear that they are only referring to the after tax sub account, none of the rest of the 401k balance.
I assume the client is still an active employee. If separated from service, the split rollover would direct the 100,000 to the Roth IRA and the entire remainder of the account to a TIRA, neither of the rollovers being taxable. That would leave a 0 balance in the entire plan. If there is a Roth 401k balance, that would also be rolled directly to a Roth IRA.