Post-tax in-service withdrawal
I am trying to pull the post-tax contributions from a client’s 401k through a non-hardship in-service withdrawal. I have done this before without triggering a taxable event. However, I just got off the phone with Vanguard and their rep told me that my client cannot pull the post-tax basis without pulling the taxable growth as well. It is my understanding that the growth is essentially treated as pre-tax money and that the client should be able to pull any post-tax amount (minus growth) they desire. The Vanguard rep also mentioned that this is not specific to the employer’s plan, but per IRS rules regarding any post-tax contributions after 1986. Who is correct?
Thanks in advance.
Permalink Submitted by Alan Spross on Wed, 2010-08-25 20:06
Sounds like the Vanguard Rep is mostly correct. However, options for in service withdrawals DO vary from plan to plan with respect to ages and classes of plan balances that can be distributed. The plan administrator must follow the plan document with respect to these distributions. Once the tax status of these distributions is identified, IRS rules require pro rating of eligible amounts between post tax and pre tax, except for pre 87 after tax contributions, which can be distributed separately.
Most plans allow in service distributions at 59.5 or later.
A few plans allow earlier in service distributions of selected balance types, but not the actual elective deferrals. The pro rate factor would be based on the amount eligible for distribution under the plan provisions and therefore would exclude the elective deferrals since they cannot be distributed. The pre tax amount included in the factor would then include earnings on all contributions regardless of type plus company matching contributions plus rollovers into the plan from other plans including IRAs.