Very confused-please help with after tax 401(k) question
Hi Everyone,
I recently left a company I had been with for 5 years. I had a 401(k) option to make 100% of my 401(k) go in as after tax dollars. That’s the option I chose. I now want to roll that money to an annuity and begin taking income sometime in the next few years. This is only a small percentage of my overall portfolio, but I will use this money as “play” money when I do take an income since most of it has been taxed already.
In looking at the transfer form on the annuity application, it’s asking whether it’s qualified or non qualified money. I know what that means, but I don’t know how to answer the question. It seems to me that when the money is transferred, the basis will be non qualified but the growth would be qualified. So, would the growth go into a traditional IRA?
Nobody seems to know a clear answer on how to do this transfer. Thanks for any help you can provide.
darius
Permalink Submitted by Alan Spross on Fri, 2007-11-02 01:02
The entire amount in that 401k is qualified money because the 401k is a qualified employer plan. This applies to both the pre tax and post tax balances.
The annuity company wants to know that because once the plan distributes the funds on a NQ account, they lose their tax status including any benefits thereof within 60 days. Even though the post tax balance in the predominant amount, you don’t want that to be taxed on the remainder at this time plus pay an early withdrawal penalty and have 20% in taxes withheld on the pre tax portion. Therefore, this will probably go into an IRA annuity instead of a NQ annuity. The IRA rules will apply to that annuity. Since there is post tax money here, you would file an 8606 to report the post tax portion on line 2 of Part I.
You also have the option of transferring just the pre tax amount (earnings) of the 401k into a traditional IRA or IRA annuity and purchasing a NQ annuity with the after tax amount. Doing that would also avoid any current tax impact and eliminate the 8606. The earnings on the post tax amount would continue to be tax deferred either way until you took distributions.
Permalink Submitted by Darius Jones on Fri, 2007-11-02 12:15
Thanks so much for the reply and for clearing that up for me. I am hoping to go with option number 2 and putting the after tax amount in a NQ annuity and the pre tax in a IRA annuity. I guess the trick to that is getting the 401(k) company to send two seperate checks, (one for the pre tax money and one for the after tax money)?
Thanks again,
darius
Permalink Submitted by Denise Appleby on Fri, 2007-11-02 12:49
Hi Darius,
There is really no ‘trick’ to it.
All you need to do is make sure you elect the right options on your distribution request form/s. If you are not sure , ask as many questions as you need to. Some of these forms are not written clearly and only create confusion for participants. If the form does not allow you to request two checks on one form, complete two separate requests, and indicate clearly on the forms that you want to rollover the pre-tax amount, and that you do not want to rollover the after-tax amount to an eligible retirement plan.
If a mistake is made, and the entire amount is processed as a direct rollover based on your instructions, then that is irrevocable.
Good luck