Roth In Plan Conversion from Employer using After-Tax Funds

Submitted by Abhinav Goyal on Thu, 2022-10-06 13:38

Hello
I recently (month back) joined a firm that lets me transfer after-tax dollars from my salary to Roth 401(k) which I have started to avail. I also have a Traditional IRA that had come into being couple of years ago as a result of 401k plan rollover from one of the previous employments.

I am concerned that as I add funds to my Roth 401(k) through automatic paycheck contributions, I will be subject to to the infamous pro-rata rule this year. If that rule applies, I will have no choice but to convert my traditional (Rollover) IRA to my employer’s 401k before the end of year. Could you please let me know whether I am subject to pro-rata rule or not?

Regards



Submitted by David Mertz on Thu, 2022-10-06 15:10

Your balance in traditional IRAs is not involved in determining the taxable amount of In-plan Roth Rollovers.  If there are no gains in the 401(k)’s after-tax sub-account that is being rolled over to a Roth account, the rollover will be nontaxable.

Submitted by Abhinav Goyal on Thu, 2022-10-06 21:17

Thank you for this information. This is very helpful. I have a follow-up question. In my case, conversion of after tax dollar contribution to Roth is immediate without any delay (before earnings occur), so is it correct that conversion is a non-taxable event?Couple more questions:1 When I retire, do I have to RMDs from 401k Roth similar to Non-Roth 401k?2. Can I withdraw funds from Roth IRA in my initial years of retirement (after 59.5) tax free or is there any pro-rata applicable at the time of distribution if I have traditional IRAs alive at that time? Thanks again!    

Submitted by Alan - IRA critic on Thu, 2022-10-06 21:39

  • Yes, if your after tax sub account balance is rolled to the Roth 401k as soon as your contribution is made, your 1099R will not include any taxable amount.
  • You would have to take RMDs from the Roth 401k at 72, or the year you retire, if later. To avoid these RMDs, it is recommended to roll the Roth 401k balance to your Roth IRA in the year prior to the retirement year. Roth IRAs do not have RMDs for the owners. 
  • Your Roth IRA will be qualified and totally tax free after 5 years and age 59.5. Rolling your Roth 401k into your qualified Roth IRA will also result in those rollover funds being qualified.
  • If you take Roth IRA distributions prior to your Roth being qualified, they have no affect on your traditional IRA distributions. There is no pro rating between the two IRA types. Your Roth IRA withdrawals will be tax free after 59.5 as long as your first Roth IRA contribution was over 5 years before the distribution. And even if your Roth IRA was not yet qualified, your regular contributions and conversions  come out first tax and penalty free after 59.5. Earnings come out last and would be subject to tax, but you probably would not take out enough to reach your Roth IRA earnings.

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