In-service Distribution of After-Tax Contributions
Client (age 51) is making normal deferrals ($27k), and also making after-tax contributions ($3k). What are the rules around doing in-service withdrawals each year for the after-tax amounts into a Roth IRA?
I found IRS.gov notes saying it has to be a pro-rata portion of pre-tax and after-tax? https://www.irs.gov/retirement-plans/rollovers-of-after-tax-contributions-in-retirement-plans
Also some notes that the plan may not allow after-tax rollovers. Let’s say the plan allows for it at age 50, but pre-tax amounts cannot be distributed until 59 1/2 so how can you do a pro rata portion?
Permalink Submitted by Alan - IRA critic on Tue, 2022-03-22 17:07
Well, it so happens that the linked IRS page is misleading by overlooking the separate account structure of the after tax sub account per Sec 72(d)(2). When the plan treats the after tax sub account as a separate account, and almost all do, the only pro rating is between the after tax contributions and the earnings on those after tax contributions that remain in the sub account. There is no pro rating with the pre tax deferrals in the plan or with company matching contributions.
While most plans treat the after tax sub account as separate, it is possible but unlikely that the plan could restrict distributions from that sub account, or it is possible if the plan includes a designated Roth account that the plan could require that the after tax contributions and their earnings be rolled into the designated Roth (an In Plan Roth rollover) instead of out of the plan to client’s Roth IRA.
Client needs to check with the plan admininstrator if the after tax sub account can be rolled out to a Roth IRA, into the designated Roth as an IRR, or split so that the after tax contributions go to the Roth IRA and the earnings on those contributions go to a rollover TIRA per Notice 2014-54.
Again, pro rating with pre tax deferrals is generally non existent while client is still employed, and not a concern.
Permalink Submitted by brcwm on Tue, 2022-03-22 17:47
Are there any constraints on when the participant can do this, or is it up to the plan to decide? What is the worst case, such as no later than 59 ½ (can I assume at least by then they can)?
Permalink Submitted by Alan - IRA critic on Tue, 2022-03-22 18:27
There are no IRS constraints, age or otherwise in Sec 72(d)(2). While a specific plan could legally limit options, most do not, other than possibly requiring that a Roth rollover be done into the plan rather than out to a Roth IRA. Others may limit the number of distributions per year to cut down on transaction costs. That said, some plans also allow automatic immediate in plan Roth rollovers of after tax contributions before they generate any gains. The specific plan needs to be consulted to understand any plan limitations.