After Tax 401k balance rolled over
Client retired and allowed to take one redemption per year out of 401k (age 55 rule of plan) and processed a partial distribution directly to himself. Also requested the after tax be rolled over to his Roth IRA. After tax balance $6,000 and breakdown is $5,000 contribution and $1,000 earnings. My understanding is the entire after tax balance could be rolled over to Roth IRA and the $1,000 of gain would be claimed as income!!!
The plan doesn’t disagree but they wont make check payable to Roth IRA from plan rather send after tax money to client with no tax withholding and he needs to process a 60 day rollover. I assume this will still work and client hasn’t had a past rollover so no issue there. My concern is I don’t want the client to get caught with an excess contribution if both parts of Roth IRA rollover aren’t eligible.
The client has pre tax, roth and after tax balances in the plan. The plan itself has a hierarchy of withdrawal for partial distributions. What is puzzling is the plan didn’t require any Roth balance to be removed, I thought when a partial distribution was made all balances had to be removed pro rata???? I thought this may be why the after tax was processed in this fashion but nothing was removed from Roth 401k bucket.
Any thoughts???
Permalink Submitted by William Tuttle on Mon, 2021-03-22 12:44
There is no IRS general prorata requirement between separately accounted for plan assets, only between separately accounted for employee after-tax contributions and their pre-tax earnings. However, a plan can have its own policies and procedures.
There is no limit on rollovers from qualified plans to IRAs. Whether they are pre-tax or after-tax going to traditional or Roth IRA accounts is irrelevant. They would not be excess contributions.
If the plan allows a rollover of the employ after-tax account, under IRS regulations they must allow at least one direct rollover and that rollover can be from the employee after-tax account to a Roth IRA.
You could actually accomplish this rollover in a non-taxable manner. If you so wish and it would not interfere with a Backdoor Roth. Even if it would, there is a possible work around to that too.
Even if the plan will not allow a direct split rollover. You can do a direct rollover of the pre-tax earnings, take a distribution of the after-tax contributions and do a 60-day indirect rollover of the latter funds to a Roth IRA. A plan is also required to do this under IRS requlations.
You will want to do it this way to avoid mandatory 20% witholding on pre-tax distributions.
60-day indirect rollovers are only subject to the one per 12 month rule from like IRA to like IRA.