Retirement plan with pre-tax and after-tax contributions

Submitted by Brian Smith on Fri, 2023-08-11 15:08

Good morning. Questions on a 401(k) that has both pre-tax and after-tax contributions:

If participant does a rollover to an IRA how are the after-tax portions handled?
How about if the after-tax get’s rolled over into a Roth IRA and pre-tax goes into an IRA Rollover acocunt?

Thank you for your help in advance.

Regards,
Brian



Submitted by Alan - IRA critic on Fri, 2023-08-11 15:25

A plan rollover should be carefully requested as split direct rollovers (see Notice 2014-54) in which a single request is made to directly roll the plan pre tax balance to a TIRA and the after tax balance to a Roth IRA. There will be no taxes due. Note that any gains in the after tax subaccount should be included with the pre tax rollover amount, with only the actual after tax contribution amount going to Roth. Of course, if there is any Roth 401k balance, that would also be directly rolled over to a Roth IRA with no current taxes. Once the client’s Roth IRA receives a rollover, the client should update their Roth IRA basis tracking unless they are over 59.5 and first contributed to the Roth IRA over 5 years ago, in which case all funds in the Roth including the new rollover will be qualified.

Submitted by Brian Smith on Fri, 2023-08-11 20:52

Thank you Alan.  Appreciate it.  Hey, additional question.  If a retirement plan has just pre-tax contributions I assume the same fact pattern above applies.  After-tax portion of contributions will go to Roth IRA and the gains would go to a IRA Rollover.

Submitted by Alan - IRA critic on Fri, 2023-08-11 22:35

  • Correct. That said, if the participant wishes to move some portion of the pre tax balance to the Roth IRA in addition to the post tax balance, they can also do that, but pre tax balances rolled to the Roth IRA will be taxable and show in Box 2a of Form 1099R. 
  • Should any after tax contributions be rolled to the TIRA they will add to TIRA basis reported on Form 8606 and result in pro rating of the TIRA as long as there is a TIRA balance. That would be a planning error, so these direct rollover requests must be carefully stated.
  • Once the desired direct rollovers have been completed, the IRA balances should be carefully checked to make sure the direct rollovers were executed as requested. 

 

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