After-tax non deductible 401K to Roth IRA rollover – Pro Rata

Submitted by Avo Mavilian on Tue, 2020-11-17 18:31

Client has a traditional 401K where employer allows in-service distributions of non-deductible contributions. They also keep separate accounts for the non-deductible contributions. Client also has an existing Traditional IRA which they plan on converting next year.

If they rollover the non-deductible account to a Roth IRA this year, do we have to include the existing traditional IRA for purposes of Pro-rata rule or do we only apply the pro-rata rule to the separate account in the 401(k)?



Submitted by David Mertz on Tue, 2020-11-17 18:48

  • As long as the distribution from the after-tax sub-account in the 401(k) is rolled directly to the Roth IRA and not first to a traditional IRA which is subsequently converted to Roth, nothing about the client’s traditional IRAs factors into determining the taxable amount of the rollover to the Roth IRA.
  • Make sure that the distribution from the 401(k) is explicitly made payable to the receiving Roth IRA (not just to the IRA custodian) for the benefit of the client, even so much as specifying the account number of the Roth IRA.  Failure to specify the Roth IRA as the payee of the distribution leaves open a greater possibility for either the 401(k) plan or the IRA custodian to mishandle the direct rollover and have it end up in a traditional IRA where the pro-rata calculation would involve the client’s traditional IRAs.

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