Permalink Submitted by Alan Spross on Wed, 2012-06-27 17:54
Only if the after tax contributions consist solely of pre 1987 contributions.
Otherwise, the IRS intends that all amounts eligible for distribution are to be taxed as if they were rolled to a TIRA which is the only TIRA of the employee, and then converted to a Roth IRA. That conversion would pro rate pre tax amounts with after tax amounts, with the pre tax portion being taxable in the Roth rollover.
Some plans effectively have a sub account for employee after tax contributions and their earnings, and if the plan allows in service distributions ONLY from this sub account, the only the pre tax balance from earnings in the sub account would be taxable if the sub account was directly rolled to a Roth IRA. Pro rating is only applied to the amounts that are eligible for distribution. Of course, after separation from service, the entire 401k plan is eligible for distribution.
There is a way to isolate the basis to get the after tax amounts only into the Roth IRA, but it involves doing an indirect rollover, not a direct rollover.
Permalink Submitted by Dennis Prout on Fri, 2012-06-29 13:52
The after tax amount is in fact separate within the 401k. It sounds like as long as that amount is paid out to the 401k account holder directly and not as a trustee-to-trustee transfer/rollover, this is allowable. Is that correct?
Permalink Submitted by Alan Spross on Fri, 2012-06-29 15:27
Yes. Usually, if there are earnings on the after tax amount, the earnings must be distributed as well. Having the distribution sent to the employee is the safest way to avoid potential IRS pro rating rules that would affect direct rollovers.
Permalink Submitted by Alan Spross on Wed, 2012-06-27 17:54
Only if the after tax contributions consist solely of pre 1987 contributions.
Otherwise, the IRS intends that all amounts eligible for distribution are to be taxed as if they were rolled to a TIRA which is the only TIRA of the employee, and then converted to a Roth IRA. That conversion would pro rate pre tax amounts with after tax amounts, with the pre tax portion being taxable in the Roth rollover.
Some plans effectively have a sub account for employee after tax contributions and their earnings, and if the plan allows in service distributions ONLY from this sub account, the only the pre tax balance from earnings in the sub account would be taxable if the sub account was directly rolled to a Roth IRA. Pro rating is only applied to the amounts that are eligible for distribution. Of course, after separation from service, the entire 401k plan is eligible for distribution.
There is a way to isolate the basis to get the after tax amounts only into the Roth IRA, but it involves doing an indirect rollover, not a direct rollover.
Permalink Submitted by Dennis Prout on Fri, 2012-06-29 13:52
The after tax amount is in fact separate within the 401k. It sounds like as long as that amount is paid out to the 401k account holder directly and not as a trustee-to-trustee transfer/rollover, this is allowable. Is that correct?
Permalink Submitted by Alan Spross on Fri, 2012-06-29 15:27
Yes. Usually, if there are earnings on the after tax amount, the earnings must be distributed as well. Having the distribution sent to the employee is the safest way to avoid potential IRS pro rating rules that would affect direct rollovers.