After tax 401K money
I have a 401K with after tax money at Delphi. Is there any reason to roll that money into an IRA or should it just be pulled out and put in a regular non-qualified account. I am making the assumption that the after tax money they are saying they will send me a check for is just contributions. It seems like it would be a pain to roll it into an IRA and have to calculate the ratio of after tax to pretax money every time I take a distribution.
Can any one tell me how this works and what the best options are?
Permalink Submitted by Alan Spross on Fri, 2011-04-22 22:46
Your best option is to try to isolate the after tax basis and convert it to a Roth IRA tax free. But this is not easy due to lack of clarity from the IRS regarding the pro rating of your basis vrs isolating it.
There are two tax code approved methods for isolating basis:
1) You can have any pre 1987 after tax contributions distributed separately and converted tax free if you leave the rest of the balance in the plan until the following year
2) Or you can have the entire balance distributed TO YOU (not a direct rollover). 20% of the pre tax amount will be withheld. You can then first roll the pre tax amount to a TIRA, and replacing the withholding as needed transfer the post tax amount to a Roth IRA.
But you may not be able to accomplish option 2 above using direct rollovers, because when the funds are not distributed to your first, the IRS says that the distribution must be pro rated. That would cause some after tax money to go into the TIRA and you would be calculating pro rate ratios for years, and part of the pre tax money would go into the Roth IRA, making your conversion mostly taxable. People have been getting away with this for a couple years now, but the IRS could tighten up enforcement procedures at any time before this year’s 1099R forms are issued. Therefore, a key question is whether you have enough cash to replace the 20% withholding until you receive your 2011 tax refund.
The best option also depends on just how much after tax money you have there as well as how much of it is pre 1987. The higher the amount, the more value in trying to get it into a Roth IRA tax free.