401(k) Rollover – PreTax, Roth, and AfterTax
Client is rolling over funds from a retirement plan that include three buckets of funds – pretax deferrals, Roth, and after-tax. I understand that the client can tell the pre-tax amounts to go to the Traditional IRA, the Roth account amounts go to a Roth IRA.
However, according to the plan administrator, the after-tax amounts cannot be split up by contributions and earnings. It was mentioned that the earnings have to be “converted” with the contributions and deposited into the Roth IRA. Is that correct? Or, can I designate the after-tax contributions go to the Roth, and the earnings on those after-tax contributions go to the IRA? Thanks.
Permalink Submitted by Alan - IRA critic on Fri, 2022-03-11 22:18
This restriction regarding the after tax sub account is abnormal. While both the earnings in that account and the after tax contributions must be distributed, Notice 2014-54 makes it clear that the earnings can be directed to the TIRA and the contributions to the Roth IRA. The plan administrator should be questioned if the plan restricts what is allowed under IRS rules.
If the plan is so restricted, a Plan B might be to have the entire after tax sub account balance distributed to the client, but 20% of the after tax earnings amount must be withheld. If this amount is modest enough, client could then do 60 day rollovers of the earnings to the TIRA and the contributions (after replacing the withheld amount ) to the Roth IRA.