After-Tax 401(k) Contributions Rolled To an IRA
Company automatically rolled client’s after-tax contributions into a rollover IRA. How do we determine which part is taxable? Is is the percentage of the entire rollover that was after-tax at the time of the rollover then apply that percentage to the current balance (no distributions have occurred). If we take distributions, are after-tax contributions taken first, last or proportionately? I assume that the after-tax portion cannot be converted to a Roth.
Permalink Submitted by Alan Spross on Mon, 2010-03-08 19:37
Once the after tax contributions are transferred to an IRA, they become subject to the pro rate rules and Form 8606. The 1099R should show the after tax amount that was rolled over. Client should file an 8606 in the first year IRA distributions are taken, and the after tax basis is added to any other basis the client may have from prior non deductible contributions. Any distributions or conversions done will be taxable based on the overall pre tax % of the adjusted year end value of all TIRA, SEP and SIMPLE IRA accounts.
The 8606 therefore will not only add the new after tax basis, but will calculate the taxable portion of any distribution or conversion on the same 8606 form.