In-service after tax 401k withdraws
Am I correct that if a 401(k) plan allows for non-hardship in-service withdraws as well as after-tax contributions, a participant can contribute after tax monies to the plan and withdraw those after-tax funds even if he’s under 59.5? Also, can they withdraw only the after-tax funds or must they be pro-rated?
Permalink Submitted by Alan Spross on Mon, 2012-06-18 20:57
Contributing after tax dollars to a qualified plan and taking in service distributions depends on the provisions of the plan. Another factor is the plan sub account setup with respect to which amounts are eligible for in service non hardship distributions.
If the plan allows only the after tax subaccount and its earnings to be distributed, the only pro rating that is done is within that particular sub account. In other words, if you are not eligible to distribute a particular balance from the plan, that balance is not factored into pro rating.
Any distributions of after tax contributions are not subject to tax or penalty if not rolled over. If the distribution consists of 80% after tax and 20% earnings, the earnings can be rolled over to a traditional IRA and the rest can be rolled over to a Roth IRA tax free. 20% of the 20% is mandatory withholding and you would have to replace that money to complete the rollovers, then you would recover it when you filed your return.