Withdrawal of after-tax 401 contributions
My company’s 401K plan allowed for after tax contributions. When it comes time to start withdrawals, how do I indicate to the IRS that this money was already taxed?
My company’s 401K plan allowed for after tax contributions. When it comes time to start withdrawals, how do I indicate to the IRS that this money was already taxed?
Permalink Submitted by mk foss on Sat, 2009-09-26 18:53
There is a box on the Form 1099R for Employee Contributions and the taxable amount of the distribution is reduced by that amount.
If you have made after-tax contributions, you should check your periodic statments to be sure you’re in agreement with the amount shown by the plan administrator so everything matches when you’re ready to leave the company.
Permalink Submitted by Dana Seidman on Sat, 2009-09-26 20:31
Thanks very much.
Another question: if this 401K is rolled over into an IRA, how and who are to keep track of the after-tax contributions?
Permalink Submitted by Alan Spross on Sat, 2009-09-26 21:41
Once you roll over any after tax distributions to an IRA, it is up to you to keep track of your IRA after tax balance by completing Form 8606.
Recently, the IRS made a procedural change on this that I think is going to cause problems. Previously, you were advised to file the 8606 with the tax return for the year that you completed the rollover. Now, they ask you to hold off on on that and not to file the 8606 until the year you next take a DISTRIBUTION from the IRA. My concern is that this is going result in many people forgetting to file the form and paying double taxes on the after tax amount. So make a reliable note to remember to report this and file it according to your organizational setup. The after tax amount rolled over is placed on line 2 of Form 8606. These forms are cumulative, so remember to pick up the correct amount of prior basis you had if you previously made non deductible TIRA contributions as far back as 1987.
All distributions from the IRA will then be pro rated between your balance of pre tax and post tax amounts in all your TIRA, SIMPLE IRA and SEP IRA accounts.
Permalink Submitted by Bruce Steiner on Sun, 2009-09-27 02:18
Are there many people who have made nondeductible or after-tax contributions to qualified plans or traditional IRAs?
Permalink Submitted by Alan Spross on Sun, 2009-09-27 02:34
Hard to tell, Bruce. But there have been a surprising number of posts regarding this issue. Many people omitted filing an 8606 to report non deductible contributions and they seem quite sure that the contributions were not deducted due to the MAGI limits. From 1987 through 1997, TIRA contributions dropped off because a non deductible contribution was the only option for many who prior to 1987 were able to deduct contributions with no income limit. And after 1997, the Roth became available but the income limits to make a regular Roth contribution were only somewhat higher than the limits to a deduct a TIRA contribution.
With QRPs, various discrimination testing failures offer recharacterization of the deferral as an after tax contribution, so some people ended up with a post tax balance without planning it. But I have never seen an estimate of the portion of QRPs or TIRAs that are estimated to be post tax.
Permalink Submitted by Bruce Steiner on Sun, 2009-09-27 16:47
I don’t know if there’s any way to know how common after-tax or nondeductible contributions are. And I wouldn’t necessarily know if a client has made any. But I’m not aware of many clients making after-tax or nondeductible contributions. And our clients tend to be people who could afford to do so. So I’m surprised at the number of posts dealing with this.
Similarly, I’m surprised at the number of posts dealing with pre-59.5 withdrawals in the form of substantially equal periodic payments, though that may be because our clients are probably better off than IRA owners generally. In addition to the complexity, early distributions (even without penalty) defeat the income tax benefits of being able to keep the money in the plan or IRA for a very long time. I’ve had a few clients for whom this made sense. In one case, a client got divorced, and instead of dividing each type of asset, he ended up with a large amount of retirement benefits and not much else, and his wife ended up with the other assets. In two other cases, the clients had extremely large retirement benefits, and it wouldn’t have made sense for them to have lived substantially below their means until age 59.5 or 70.5.
Permalink Submitted by mk foss on Sun, 2009-09-27 23:11
I have many clients that make after-tax contributions to IRAs. For the most part, they are the people who contributed $2,000 per year to an IRA in 1982-1986 when it was allowed for those covered by qualified plans.
When we had the dot.com explosion in the late 1990s – many young people in Silicon Valley had large rollover IRAs and took early retirement (in their 40s) using the SEPP exception for income. The monthly withdrawals were high and usually had a cost of living factor added. When everything went bust by early 2001, the IRAs were in bad shape. IRS touted Rev Rul 2002-62 (October 2002) as the solution but it was too little too late. I haven’t seen many recent uses of that exception.