In service distribution with after tax dollars
I am 50 years old, working, with a 401k that has $150k in after tax basis and $25k in earnings. My 401k will distribute a check directly to me (175K) with 20% withholding on the taxable portion ($5,000) = net $170k.
Within 60 days I will roll $25k to a trad IRA and $145k to a roth IRA (tax free conversion). Do I pay penalty on the $5k that was withheld or can the after tax dollars be the “designated” funds for the withholding. I do not have other dollars to make up the withholding.
Would this work?
Permalink Submitted by Alan Spross on Thu, 2012-11-08 17:53
Yes, you would not owe tax or penalty on the 5k, because the first dollars you roll over are deemed to be the pre tax amount (25k). That would mean that the 5k was after tax dollars and there is no tax or penalty on the distribution of after tax dollars including withholding of that amount. There would be just one 1099R issued. To be clearer about the withholding, look at it as being first distributed to you and then paid by you to the IRS as withholding from the after tax amount.
Perhaps you should consider a direct rollover of 25 to your TIRA account. Withhholding would be avoided. Ask for a check for the 150k and then roll it to your Roth IRA. That way the rollover is complete and your Roth will be 5k higher with no out of pocket. This would produce a separate 1099R for each amount, but no taxable amount should show in Box 2a for either.